What are the chances you could be afflicted with a chronic illness or disability that would leave you unable to care for yourself for an extended period of time during retirement? The answer might surprise you.

The vast majority of Americans don’t believe they will ever enter a nursing home or need any long-term-care services. If you’re age sixty-five, you have a 45 percent chance of entering a nursing home. Fifty-three percent of those who enter nursing homes stay for more than one year. Those odds, of course, increase with age. Women, because they live longer than men, have a greater likelihood of needing long-term care at some point. Sixty-eight percent of nursing home residents are women.

The High Cost of Aging

Long-term care is not just a health issue, but also a financial concern that can throw a wrench into your retirement planning. Currently the average cost for a one-year stay in a private room in a nursing home is $76,460 ($209 per day); semi-private rooms run $68,408 ($187); assisted living facilities average $36,090 per year ($99 per day); and the average home healthcare rate runs $29 per hour. Two hours of home healthcare each day would cost $21,170 per year.

Today, the average nursing home stay is two and a half years at a total cost of $171,020.10 The same stay will cost $374,725 in twenty years, assuming nursing-home costs continue to rise 4 percent per year. What will it cost for a two-and-a-half-year stay when you reach age eighty? You can see the impact these costs can have on reaching your retirement goals. Large long-term-care expenses could deplete your assets prematurely. The strain on your nest egg is compounded in the event of Alzheimer’s. The average nursing home stay for Alzheimer’s victims is seven years.

Who Pays for Long-Term Care?

Long-term care leads to poverty for a disturbing number of retired Americans. Of those receiving long-term care, 18 percent pay for it out of pocket. Within a year of admission, more than 90 percent of these private-pay residents are impoverished. Medicare and health insurance coverage typically pay little for long-term-care nursing home facilities. Medicaid, a government welfare program, will pay, but only after you have depleted all other financial resources. The government currently pays about 70 percent of all long-term care expenses. Although long-term-care coverage is affordable, only 7 percent of long-term care expenditures are paid for through the utilization of private insurance coverage.

According to these statistics, if you don’t own a long-term-care policy, the odds are very high that a lengthy nursing home stay will completely eat away your assets and leave you dependent upon Medicaid.

Cost of Coverage

Long-term-care coverage, like life insurance, is cheaper if you purchase it when you are younger and healthier. A policy purchased at age sixty-five will generally cost twice as much as a policy bought when you’re fifty-five. For example, a fifty-five-year-old can plan on paying a premium between $500 and $1,000 per year for four years of coverage. That same policy would cost a sixty-five-year-old between $1,000 and $2,000. Those in their seventies may be required to pay as much as $3,000 to $8,000 for similar coverage, depending on the policy’s features. Premiums will almost double for coverage purchased for a married couple.

Buying coverage when you are younger will reduce your premiums, though you will likely pay them for a longer period of time. To obtain a quick, free quote to get an idea of how much a long-term care policy will cost, spend five minutes at www.ltcq.net or www.insure.com.

Who Should Purchase Long-Term Healthcare Coverage?

Long-term-care insurance is not for everyone, but very essential for some. The following will help you decide if you should buy a long-term-care policy.

LTC is for you if...

You would like to insure your independence and not become a burden to your family.

Your family has a history of ailments requiring long-term care (e.g. Alzheimer's, diabetes, strokes.)

You have sufficient money to pay premiums every year.

You want to preserve assets for family members.

Paying for long-term care for one spouse would seriously hamper your ability to accomplish retirement goals.

You are in good health and qualify for lower premiums.

You are between age forty-five and sixty and can lock in lower premiums for life.

LTC is not as important for you if...

You have health conditions making the cost of LTC coverage too expensive compared to the benefit you may receive.

You are likely to cancel the policy because your fixed income won't keep up with the increasing premium payments.

Your only source of income is Social Security.

You're self-insured because of the size of your financial portfolio.

Buying an LTC policy stretches your budget to the point of having to forego other financial needs (e.g. paying for utilities, buying food or medicine.)

You are seventy-nine or older (although you may need coverage, premiums will likely be too high.)

How Much Coverage Do You Need?

You can purchase coverage that will provide a daily benefit of anywhere from $50 to $400. To determine how much long-term coverage you need, first decide how much long-term care you can afford to cover out of your own pocket. For example, if the average nursing home cost is $150 per day in your area, and you can afford to pay $50 per day, then you would need a policy to cover the $100 difference. You should plan on needing this benefit for at least two and a half years, which is the average nursing home stay.

Estimating what you can pay out of pocket can be a difficult process. You must attempt to predict your future financial status and the future cost of long-term care. The best method for doing this is to revisit the retirement section of your financial plan and enter some additional hypothetical situations. For example, how would it affect your retirement assets if you or your spouse entered a nursing home at age seventy-five, eighty, or eighty-five, and you had to pay $68,000 per year, adjusted for inflation? Would this eat up all of your assets? Would the spouse living outside the nursing home have enough money to meet living expenses? Your retirement plan can help you answer all these questions. Be more exact in your planning by contacting nursing homes in your area and base your estimates on local costs.

It’s one of the boldest questions you can ask in our professional culture. But it can be the most rewarding. If you’re looking to break into a new industry, salary information from a friend in the field is more useful than any published statistic. You get the benefit of knowing her career trajectory, her responsibilities and the specifics of her employer. While blurring the friendship line with work talk can be daunting, asking a peer to be a mentor will facilitate full disclosure.

But the real high-stakes game of truth or dare is sharing salary specifics with a co-worker. It’s awkward, paranoia-inducing and the answer can be hard to stomach. But the benefits can’t be underestimated. If you’re feeling undervalued at work, finding out about a colleague’s salary can serve as hard evidence or surprising consolation. The knowledge can also promote confidence come time for raise and salary negotiations. “With an average inflation rate of 3 percent, you need to make sure that your salary is keeping up with the changing value of the dollar,” says Von Tobel, whose site covers salary negotiation tactics. “Not talking about money benefits your boss far more than it benefits you.”

Personally, I don't ask anyone what they make. Of course I wonder and can guess, but I consider it rude to outright ask.

I don't know what my parents make, I don't know what my friends make, and I don't know what my co-workers make. I do know what one family member makes, but that's simply because she got a great promotion and pay increase a couple years ago -- almost doubled her salary.

And I certainly don't see a lot of benefit in asking people what they earn.

Perhaps I'm wrong and Yahoo is right. Either way, I thought it would make an interesting conversation.

So, do you ask people what they make? Who do you ask? And do you tell others what you make?

Many readers of this blog will be familiar with the idea of living on a budget. Whether the aim of that budget is to save up for a big purchase, to enable you to pay off debt or simply to ensure you live within your means budgets simply make sense.

But there's also a potential problem here; living on a budget means self control. It may involve careful planning, not purchasing things you really want or working hard all month only to send off a chunk of your earnings to a credit card company or loan provider rather than treating yourself to a few of lifes luxuries.

In short, while living on a budget makes sense it can also be kind of tough. And the tighter your budget, the less fun it can be. Living on a budget can feel like you're running a marathon - just tripping along one step at a time, not really having much fun along the way but just waiting for that feeling of satisfaction and achievement when you finally cross that finish-line.

Considering this realization recently my mind started to wander about ways in which we can both live on a realistic budget that will help you to achieve your financial goals whilst not feeling like you're denying yourself some of the pleasures in life enjoyed by your friends and family. Where being on a budget is actually fine - and where you're able to live a full and enjoyable life while still putting money aside for the things that really matter.

The more I thought about it the more the word "abundance" and "riches" kept coming up. And while living on a budget can superficially seem at odds with these words, money is only one way to measure these factors. A life full of riches doesn't have to mean Tiffany jewellery and private jets. It can just as easily mean a well-rounded life full of purpose, of pleasure, of satisfaction and of fun.

And these things don't need to cost the earth - indeed many are so cheap or free that they can easily be slotted into life on a budget meaning a more enjoyable lifestyle while still meeting all your financial obligations.

Decide What's Really Important To You

What we think we want and what we really want aren't necessarily the same thing. Many of us spend time and money on things that really aren't bringing us too much pleasure.

Consider your expensive TV subscription. Do you love the shows you watch? Do you relish getting home at the end of the day so you can dive into the latest episode of your favorite TV show? Or do you have it simply because it's there and you haven't got around to reducing (or cancelling) your package?

Is that new pair of shoes you saw in the mall really going to make you that much happier or in all honesty do you really already have more shoes than you can wear?

What about spending quality time with your kids or friends? Do you do enough of this really or do you have to fit them around the rest of your life? Are you "in the moment" when you're with them or are you thinking about that presentation you have to give at work tomorrow?

The first key step is taking the time to be honest with yourself about what "riches" really mean to you. What excites you? What makes the time fly by when you're doing it? What really gives you a warm glow inside when you do it?

Often these aren't things like buying a new car or getting the latest cell phone but instead are more based on relationships, personal growth and achievement.

Remove Unimportant Items

Part of the art of simplicity is having the strength to get rid of those elements of your life that don't really stack up. Those elements which you realize don't make you happier, which take you in the wrong direction to that of your goals or that make your life more stressful, expensive or complicated than it needs to be.

Removing these things from your life means not only more time but also more money to spend on the things that really matter to you.

To give you a few personal examples I managed to reduce my cell phone bill by 80%, stopped buying takeaway food and opted to cook at home more often instead, took a brown bag lunch to work rather than wasting money on premade sandwiches and managed to arrange a pay rise at work which meant I could actually work half a day less each week yet earned slightly more than before.

Love Your Job

Many of us work 40 or even 50 hours a week and this means you will likely spend more time with your work colleagues than you will with your family. You'll spend more time at work each day than you will spend doing anything else so for a truly joyful life while living on a budget you need to enjoy your work.

If you hate your job, look around at other options. This doesn't have to mean anything as complicated as changing your whole career and retraining to do something else (that might have to wait till finances allow) but can be as simple as transferring to another department or branch where you get on better with your colleagues.

Treat Yourself Without Guilt

If you've managed to save money through an intelligent process of elimination then you should have some extra cash available each month - no matter how little. Assuming you're still able to meet your financial objectives without this extra cash, why not take the time to consciously treat yourself from time to time - and do it without guilt?

Take your partner out for a romantic meal. Go to the salon. Go away for the weekend. Do something that you'll be remembering for months to come. Make it special and remember that it doesn't have to be expensive. For example a weekend away doesn't have to involve foreign flights and expensive hotels. It could simply involve staying with friends you haven't seen for some time to save your budget and just spending a little money on entertainment.

Use Reward Cards

Many companies are operating in a cut-throat market and so constantly try to introduce "loyalty programs" to keep us coming back for more. Used intelligently you can participate in these programs while going about your everyday life and then earn rewards as a result.

One friend of mine just took a week off work to spend with his children. He took them to all manner of theme parks, zoos and other attractions. When I asked him how much all that cost he smiled and told me that he gets points every time he does his weekly grocery shopping at the local supermarket and cashed them all in for vouchers to pay for the entry to all those attractions. His total expenses were a bit of gas to drive the kids around. Besides that he spent nothing more than a normal week yet had the time of his life.

Join A Local Club

Look around you and you'll likely find dozens of local clubs. From slimming clubs to art classes, from book clubs to those teaching you how to research your family tree or fix your own car.

In my experience these local clubs - run by local people - have numerous benefits. They offer you a change of scenery and an opportunity to make new friends. They encourage you to learn a new skill and best of all they can be very cheap indeed.

The judo club I went to recently cost me less than $10 for the evening and helped me to get a good workout but I also had the time of my life - in stark contrast to just sitting infront of the TV all evening.

Invest In Your Relationships

We humans are social beings and possibly more than any other factor in our lives having positive, constructive personal relationships is the most important.

But being honest here - how much quality time do you spend each week with your friends and family? Do you have any friends and family members you haven't seen (or even spoken to) in months - or even longer?

From reconnecting with old friends through Friends Reunited or Facebook to surprising your partner with breakfast in bed to helping a work colleague move house it is these relationships which will bring you real "riches" - without you having to spend a fortune.

Do Something For Those Less Fortunate Than Yourself

Volunteering has two main benefits. Firstly you get to help out those less fortunate than yourself but an added bonus is that it can make you feel great. And at little or no cost.

Most of us have things we're passionate about whether that's the environment, children, animal welfare or whatever. Volunteering - no matter how little time you can spare - is an opportunity to really contribute to something you care passionately about and also to meet other like-minded individuals who, by default, you will probably have a lot in common with.

Lastly volunteering can open up all manner of possibilities for the future. There are numerous people I have spoken to that have turned a part time volunteering position into a full-time career doing something they love. When you invest your time into something like this the returns - and not just in terms of personal satisfaction - can be amazing.

Me Time

How much time do you get to yourself to just "be"? If you're like most people the answer is probably "not a lot". And yet sometimes taking time alone - to gather your thoughts, take a walk, soak yourself on a hot bubblebath or just relax with a good book - can be just what the doctor ordered. Time without responsibilities or to-do lists. Without pressure or stress. Time away from the "real world" where you can unwind, relax and be yourself.

Of course this costs nothing - apart from the conscious effort to create (and "block off") this time so that you can focus purely on yourself for a short while. You work hard. You deserve it. Now make it happen.

All of these different elements can combine to create a rich and enjoyable life without it costing you the earth. And the easier it is to live on your budget - the more enjoyable life is - the more successful you will be sticking to it and achieving your financial goals whilst still having the time of your life. Why not consider some of these options today and I would also like to encourage you to leave us a comment below telling us about ways you have made living on a budget a more enjoyable experience.

"Toileting” is not a term you’d expect to find in a retirement-planning book like this. However, it is a term that describes what many retirees, their families, and caregivers must face every day. The definition of toileting is “getting to and from, and on and off, the toilet and performing associated personal hygiene.” As you age and your health deteriorates, you may need help with many of the things you take for granted today. If you do need assistance performing the basic activities of everyday living, who is going to provide it for you? Not being prepared for this possibility carries some devastating consequences, such as prematurely depleting your assets, receiving substandard long-term care, or becoming a burden to your family.

How interested do you think your children would be in applying for the following job listed in your local paper’s Help Wanted section?

Home Healthcare Aide: Home healthcare aide needed to provide twenty-four-hour, seven-day-a-week care for a poor, eighty-five-year-old bedridden patient suffering from Alzheimer’s disease. The elderly patient requires room and board and must move in with you and your family. The patient requires constant supervision and will need a baby-sitter when you leave your home. Must be able to administer eight to ten medications daily and make frequent trips to the doctor’s office. Applicant should enjoy cooking and cleaning and be proficient at toileting. Diaper changing skills are also a plus. The job will likely last one to two years but may last ten or more. This is a volunteer (unpaid) position. No experience necessary.

Now ask your children how they would feel about accepting this healthcare aide position if you were the patient needing the care. Would you like to heap this burden upon your children and their families? If you don’t want to take the risk of becoming a burden to your family, you need to do some planning. You can either purchase a long-term-care insurance policy or acquire sufficient assets to provide for both you and your spouse if you should enter a nursing home during retirement.

Becoming a Burden to Your Family

The above scenario is one Howard and Karen Everett know all too well. Three years ago, while visiting Karen’s eighty-four-year-old parents, Glenn and Shirley Kramer, Karen discovered that the Kramers were no longer able to take care of themselves. For example, Karen noticed that her parents weren’t washing their clothes regularly, and when they did wash them, they did it by hand because they couldn’t remember how to use the washer and dryer. Karen also noticed that her parents left the stove on frequently and were eating spoiled food. Cleanliness was becoming an issue.

It looked as if Shirley and Glenn had forgotten how to live. It was clear that Glenn was beginning to exhibit some early signs of dementia, and Shirley was diagnosed soon after with Alzheimer’s disease. Allowing them to continue to live alone would be dangerous. They clearly needed help.

Because of her parents’ limited assets and lack of planning, Karen believed that she and Howard had only two options: they could place her parents in a nursing home and let Medicaid pick up the bill, or they could move Glenn and Shirley into their own home and take on the daunting task of twenty-four-hour care.

They started to explore nursing-home options and visited several inexpensive homes. Unfortunately, the facilities were run down, often smelled bad, lacked cleanliness, and were understaffed. The Everetts concluded that their parents deserved better and immediately made arrangements to move them into their own home. Little did they know what they were getting themselves into.

Most of us wouldn’t have the stomach and stamina required to take care of one elderly parent, let alone two. Watching up close as both parents completely lost their dignity and were reduced to the equivalent of one-year-olds took its toll emotionally and physically on the Everetts. Would you like your children to do for you what Karen and Howard did for their parents? Consider for a moment their daily routine.

Karen worked around the clock, cooking, cleaning, bathing, toileting, dressing, feeding, blowing noses, administering medicines, clipping toenails, changing bed sheets when wet or soiled, cleaning up when accidents occurred because of incontinence, changing diapers, answering the same questions over and over, and helping them find their beds when they wandered the house at night. Around-the-clock care was utterly exhausting.

Although less costly than a nursing home facility, home care carries its own financial drain. Adult diapers and specialty dietary items are not cheap. Utility costs also increased, since neither parent could sleep with the lights off. Home maintenance costs rose, because of accidents such as the basement flooding when Shirley left the water running in the bathroom. Also, many modifications were made to the home to assist with deteriorating physical health.

The Everetts’ lifestyle changed completely. Three years ago, with their kids grown, they were looking forward to winding down Howard’s career by traveling and enjoying their increased freedom. This is not exactly what happened. All travel was completely out of the question. In fact, it was difficult just to go the store. Somebody always had to be home. This meant that the Everetts rarely, if ever, went out together or even visited other relatives. If they did leave the house, they had to find a baby-sitter. Their married and college-age children helped out when they could but weren’t always excited about having to change Grandma’s diaper.

Besides not being able to leave the house, Karen and Howard found that they couldn’t have friends over, either. Shirley had difficulty getting dressed by herself, but she had mastered the skill of taking her clothes off (and often did), making stark-naked appearances at the least expected times. Most dinner guests would prefer not to see an eighty-four-year-old in her birthday suit. Their only social outings, it seemed, were occasional visits with support groups to cope with the pressures of taking care of elderly parents.

The worst component, however, was the realization that their relationship with their parents had changed. Adoration grew into aversion, and respect decayed to resentment. While they still loved their parents and would continue to provide the needed care, they privately wished their parents would have been more wise by preparing for this stage of life.

So what advice would the Everetts give you? “Buy long-term-care insurance. You will maintain your relationship with your children and grandchildren, and they won’t have to experience with you the loss of your dignity.” The Everetts felt so strongly about this that they bought themselves a long-term-care policy to cover the costs of professional care.

Leaving Your Spouse with Nothing

Let’s fast forward to the day you reach age eighty and assume you enter a nursing home and stay for five years before dying. Let’s also assume your spouse is healthier and younger than you. Could the assets you’ve accumulated cover the additional expense of a nursing home stay? A nursing-home stay could double your annual retirement expenses. Of course, in addition to covering the cost of a nursing home, your spouse, who will likely continue to live in your family home, will still need money to meet the expenses of everyday life. And who knows, your spouse may need a continued stream of income for another twenty years.

If your assets aren’t sufficient to cover the costs incurred by your going to a nursing home and also the continued cost of retirement for your spouse, then you are a candidate for long-term-care insurance. If your nursing-home stay completely drains your nest egg, your spouse could be literally left with nothing but your home and a monthly Social Security check. No one wants to be forced to live on Social Security alone.

$500,000 to Spare or $0 and Destitute

David Sanders, a sixty-two-year-old office manager, plans to retire this year and begin enjoying the good life with his wife, Mary, age sixty. According to his retirement calculations, he has accumulated enough money to enjoy a $50,000 annual retirement income (after taxes and inflation). In fact, using modest rates of return, his projections show that thirty years from now they will still have a nest egg of more than $500,000. A modern-day success story, right? Well, maybe.

One thing David did not plan on is the possibility that some of their assets may be needed to cover long-term-care expenses. What would happen if either David or Mary require nursing-home care sometime during retirement? Could their nest egg withstand the additional expense? To answer this question, David needs to take a few extra steps in his retirement calculations.

What if, at age seventy, David enters a nursing home that costs $60,000 per year and stays for five years before he dies? Of course, $60,000 per year will have to be withdrawn from the Sanders’s nest egg for five years to take care of David in the nursing home, while Mary will continue to need $50,000 of income each year to cover the originally planned retirement expenses. The additional nursing-home expense will more than double the amount they must withdraw from their investments during these years. Should this occur, their investment assets would be completely depleted by the time Mary is age eighty. She would have to live out her remaining life on Social Security alone.

If David does not require this nursing-home care until he reaches seventy-five or eighty, their assets would last a little longer. Mary would run out of assets at age eighty-one and eighty-three, respectively. Needless to say, an extended long-term-care stay by David would leave Mary penniless.

The Sanders have two basic options: accept the risk of depleting their assets and do nothing in hopes that neither one of them requires care or purchase a long-term-care insurance policy to cover the cost of long-term-care expenses should they arise. What would you do? Have you considered long-term care expenses in your retirement projections?

Recently MasterPo had an insightful (and rather unsettling) conversation.

The other person, a woman in her early 40’s, said she has $50,000 in credit card debt. Like most credit card debtors she’s paying very high interest which causes less and less of the minimum payment to be applied to principle. Thus, according to the disclosure on the statements, indicate at min payment it will take 20 years to pay them off (presuming of course no additional charges).

And, like most credit card debtors, this didn’t happen overnight but built up over time as she charged this or that she didn’t have the cash to pay for but felt she “needed”. In truth, some of the things she charged were really needed like gas for the car to get to work, food, basic clothing (this person doesn’t at all dress lavish), etc.

So MasterPo asked her a question: “If you could make all these debts just go away, have a totally clean slate, what would you do differently to prevent yourself being back in this situation a couple of years from now?”

Her answer: “I don’t know. Probably nothing.”

MasterPo has sympathy.

MasterPo has been in the situation where you do need something urgently so it gets bought on credit. Yet, even while signing the receipt, having no idea where the money to pay the bill will come from and just hope to figure it out later. Not a fun way to live!

Yet it is the response that most troubling: This woman has not recognized there is a fundamental flaw in her living style that encourages frequent over spending and high debt. Plans can go astray and certainly life comes at you fast from odd directions you never see until it’s upon you. But not even considering a plan to remain debt free (if she could erase her debt) is all too typical these days.

But then again, why not?

Why do the right thing?

There are no debtors prisons anymore.

In spite of various bankruptcy reforms passed it’s still pretty easy to declare.

The government (regardless of administration) keeps demonizing banks and lenders for wanting to be repaid (how absurd to loan money and expect repayment on time and in full!)

The government keeps forcing lenders to “work with” people to pay off debt instead of enforcing the original terms of the agreement.

You can’t really be denied much for having bad debt – the rates may be higher but there’s always somebody willing to lend to you.

A person can’t really be denied a job or advancement (in spite of the claims of a credit check – something MasterPo never understood anyway but let’s not digress…)

MasterPo doesn’t know how this woman is going to get out from under, nor even if she really wants to be! Even if she does odds are pretty good she’ll be right back in the same situation.

Still, why condemn her when our own government is basically doing the same thing.

September 28, 2010

I'm working for a wealth management company that is "new age" in their corporate ways. There are no cubicles, defined career paths, and it's a very young crowd. The department I'm in has about 150 employees. Supervising them is 1 senior administrator per team, and one Supervisor per team. There are 5 teams. So in essence, there are 10 supervisor positions available. I've learned every aspect of my job and am considered an expert in my field of IRA's. I've written three procedure guides now used for training, and have managed one of our biggest projects for the past two years.

I'm extremely ready to move on in my career, however, the management positions that I mentioned before rarely open up. Any open job must be posted, and anyone can apply for any job throughout the company which means on average, 15-20 applicants per job, and they interview everyone of them. I've gotten all the experience I can here. I'm taking MBA classes after work but won't be done til 2012.

Here's the kicker. My salary has increased 4.4% in 3 years. I'm trying to look outside, but here's another kicker... we have a baby due in February and I'm anxious about switching to a new company when I'll be taking about 1-2 months off when the baby is born. But in a paradox, with the baby coming we'll need more money. I can't think of the next logical step, and I'm bored out of my mind at my current job since it's become so "not-challenging."

We've discussed the value of a college degree from various angles and perspectives over the past few years (even to the point of asking if any college degree was better than no college degree). I'm a big believer in getting a college degree (for most people and if done the right way). My MBA in particular has been a goldmine and if I had NOT gotten it, there's no way I would have earned nearly as much as I have throughout my career. So when I recently ran into several different pieces on college degrees, the value of a degree and the like, I knew I had to throw them into the discussion by giving you all the highlights.

The average starting salary offered to 2010 graduates with a bachelor's degree is $48,288, according to a survey conducted by the National Association of Colleges and Employers. That's down 0.7% from $48,633 last year.

A graduate with a bachelor's degree in petroleum engineering, for example, can expect to earn a starting salary of $77,278, on average. That's the highest of all majors in the survey and was followed by chemical engineering, mining and minerals engineering, computer science and computer engineering.

Meanwhile, liberal arts majors can expect to be offered a starting salary in the range of $35,508, down 3% versus last year. Psychology majors were the hardest hit, with initial salaries plunging 6.7% to an average of $32,260, while offers to English majors dropped 1.8% to $35,946.

Overall starting salaries for business majors, once among the most lucrative degrees, were essentially unchanged from last year at $46,672.

Earning $48k puts you above half the income earners in the US (if my numbers are right -- see the link to the left for details). Can that be true? I'm inclined to believe that the average earner brings home $40-$45k, but $48k as a STARTING salary seems high to me. Does it to anyone else?

Guess what a first-year lawyer right out of law school makes at a major law firm? For major firms outside of New York City, the starting salary is $145,000, plus a bonus that can add $20,000 to the total package. For major firms in NYC, starting salary can hit $160,000 or more, with bonuses as high as $40,000. Welcome to the world of big law. But here's the kicker: The high salaries may not be worth the cost of law school.

So why is it potentially not worth it? Because the cost of law school is so high. The author argues that the graduate can leave with $150k in loans (not counting what he borrowed for an undergrad degree) and this can make the law degree not worth it.

Yes, that's true. If done the wrong way, almost any degree can be shown to be "not worth it." But there are tried and true ways that you can make the most out of a college degree that combine getting the best salary possible from a degree/school that cost you the least amount possible. IMO, this is the way to go about getting any degree, including a law degree.

In an almost separate point (not part of the law school discussion), the video in the center of the Smart Spending piece notes the following:

According to the College Board, it takes 14 years before a college grad's income minus their debt beats out the earning power of a high school diploma.

I get several things out of this:

It takes a good amount of time before getting a college degree is better than not getting one (BTW, I'm sure this includes the fact that the high school grad earned four years of salary while the college grad was going to college).

That said, on average, a college degree does beat out a high school degree. And though it takes 14 years to break even, the college grad then has 25 years or so of better earnings ahead of them after that point. Not a bad deal.

If you take my advice and make the most of your college degree, you can maximize your income while decreasing (or eliminating) your debt and thus make your degree pay off in under 14 years (well under 14 years if you do it right.)

1. Penn State2. Texas A&M3. University of Illinois at Urbana-Champaign4. Purdue University5. Arizona State University 6. University of Michigan, Ann Arbor 7. Georgia Institute of Technology 8. University of Maryland, College Park 9. University of Florida 10. Carnegie Mellon University

Notice anything about these schools? None of them is Ivy League/prestigious (unless you want to count Carnegie Mellon). They are "good" schools but not "the best." And yet companies like to hire from these, huh? Sounds like these schools offer a good blend of affordability and performance (they get you a job.) Then again, these ratings aren't based on job-at-graduation percentages or starting incomes. Perhaps only 50% of grads from these schools get hired and the reason recruiters like them is because they can pay the grads peanuts (I'm not saying these are true, just bringing up some potential arguments.)

But we don't have to guess at the motivation, the piece tells us:

State universities have become the favorite of companies recruiting new hires because their big student populations and focus on teaching practical skills gives the companies more bang for their recruiting buck.

Under pressure to cut costs and streamline their hiring efforts, recruiting managers find it's more efficient to focus on fewer large schools and forge deeper relationships with them, according to a Wall Street Journal survey of top corporate recruiters whose companies last year hired 43,000 new graduates. Big state schools Pennsylvania State University, Texas A&M University and University of Illinois at Urbana-Champaign were the top three picks among recruiters surveyed.

Ok, so it gets down to the fact that can save money in recruiting costs. As such, I'm not sure how much this is telling us about how good of a deal these schools are or aren't. It probably isn't telling us a whole lot.

Because of the Bush tax cuts currently in effect, if I sell my stock anytime from now until the end of the year, I will pay 0% in capital gains. If congress does NOT extend the tax cuts, then next year they roll back and my capital gains rate goes to 10%. That means if I sell on or before Dec 31st I will pay $0, if I sell on or after Jan 1st I will pay $1500 in taxes.

Sometime in the next 3 months I am inclined to simply sell the stock and rebuy it back again the same day. This would effectively “lock in” the rebuy-price as my cost basis for tax consideration in the future. I could do this without penalty because there is no 30-day wash-sale rule regarding capital gains, like there is for capital losses.

Now, here’s my dilemma. My eldest son is a senior in high school, meaning I am about to start down the process of filling out the dreaded FAF (financial aid form) that colleges use to determine a family’s “need” for aid. If I take that large cap gain, will the FAF consider ours to be a family that earns $85,000 per year and therefore less “needy” as far as aid goes?

I know taking the gain now will save me $1500 in taxes. The question is, will it potentially cost my son and I more than that in financial aid?

The New Job Security is a work agreement that you make with yourself. You consciously decide to take the initiative in your work life, to set your own course for your current employment and future alternatives. No, this doesn't mean that you're going to tell your boss what to do and tell everybody else to get out of the way. It does mean that you will have your own professional goals and fallback plan. You decide how you're going to play to win, and you tweak your strategy according to the cards you are dealt. As you transfer the control of your job security to yourself, you'll develop an overall strategy to help you get what you want from your work. You'll learn how to develop a demand for your services, either at your current company or a new one, so you will always have choices. You'll identify goals and the skills that you'll need to reach them. You'll develop backup plans to help you conquer the challenges that will inevitably appear. Anticipating change and being ahead of the game, positioned where you want to be before shifts in the economy or company occur, will keep you vital. Watch out world: you're taking control and you're going to make a difference.

Now you can see why I like this book so much! Here are a few comments from me on this subject:

I'll be covering the highlights of this book over the next week or two (plus have a guest post from the book's author!), so stay tuned. You're sure to learn a few more tips for making the most of your #1 financial asset.

The next time you travel, instead of a hotel, consider an experience more unique and potentially more comfortable: renting a home from a private homeowner.

The idea is simple: Instead of cramming yourself into a tiny hotel room, rent anything from a sofa to an entire house. You win by getting a lot more space and amenities for the same or a lower price. The homeowner wins by bringing in some extra cash.

GREAT idea IMO! I've actually had lots of experience with this idea:

We had friends that rented a condo when they went to Disney several years ago. So when we went to Disney World, we did the same thing. We paid something like $89 a night for a three-bedroom condo that was 10 minutes from all the parks. We had our own kitchen (saved us a ton on food costs), laundry in the condo (could pack less), PS2 on a big-screen TV, free internet access, and MUCH more room than in a hotel.

So whether it's a home, a condo, or an apartment, you can save a good amount of money (as well as get better accommodations) by renting a place rather than staying in a hotel.

A couple keys to making this idea work from our experience:

Be sure you deal with a reputable company/homeowner. In Disney we used a management company that our friends had used, so we knew they were good.

Be sure that your location is not far off the beaten path. There's no point (IMO) of saving money if you're so out of the action (unless that's what you're going for) that it makes your vacation a pain.

Today we're going to talk about one of the "seven keys to Jewish success" that the authors list: understanding that real wealth is portable; it's knowledge. (BTW, this "key" goes nicely with "key" #3: successful people are professionals and entrepreneurs.)

This whole chapter is an ode to higher education. The authors detail much of the information that we go over regularly here at Free Money Finance, in particular how much more those with a bachelor's degree earn over a lifetime versus those with no college education (and the more education, the better -- in general.) They also give statistics on Jewish higher education (from a 1990 study, so it is a bit dated):

87 percent of college-age Jews were enrolled in college versus 40 percent for non-Jews.

So, more education (in general) leads to a higher income and Jews have more education than average. Hence, Jews have more income than average.

September 25, 2010

I'm turning 50 this week, probably the most significant milestone after birth. It's a good time to assess progress on all fronts--physical, emotional, spiritual--and of course financial. If you are close to either side of 50, I'd like to outline the ideal scenario to help you make your own financial assessment.

We should have been saving 15% of our income regularly. Even if we don't want to retire until age 70, by 50 we should be well on our way toward securing our retirement. We have managed to save about eight times our annual lifestyle spending. With a $100,000 per year lifestyle, that means we should have saved about $800,000 toward our retirement.

Our savings should be in after-tax account such as a Roth or taxable account. Pre-retirement accounts must be discounted by about a 30% tax rate. Thus $800,000 in after-tax dollars is equivalent to about $1.14 million in traditional retirement accounts.

We are probably at the point where our children are in college or have recently graduated. When college funding is complete, it's time to reevaluate and perhaps drop term life insurance coverage depending on our individual circumstances. We purchased the insurance to make sure our children would have enough money to complete their education. When term premiums rise and college accounts are fully funded, we should probably drop our coverage.

Our estate plan should be in place and fully implemented. Various assets are handled differently. A thorough review at age 50 is in order to ensure the titling and beneficiary designations are correct on each asset from our Roth account to our Health Savings Account.

If we haven't been saving enough or were not invested wisely, we have one last chance after children and before retirement to catch up. Age 50 is the first year we are allowed to take advantage of increased savings and catch-up provisions. Maximum savings in a 401(k) or 403(b) account increases from $16,500 to $22,000 at age 50. Roth contributions also increase from $5,000 a year to $6,000. If we don't have eight times our lifestyle spending saved, now is the time to press these limits.

Saving well is half the battle; investing well is the other half.

At 50 we still have a significant amount of time before retirement. Even if we retired early at age 62, we would still have several years of growth before we needed to start taking withdrawals. At age 50 and even well into retirement our portfolio should still be invested aggressively in equities. An average asset allocation might put 81.6% in appreciating equities and only 18.4% in stable fixed-income investments.

At 50, men have an average life expectancy of 28 more years. Women get an extra 4 years. If we are fortunate, those numbers will be even greater. Age 78 is average, but with healthy life choices and medical advances, we may enjoy an even longer life. Those of us with the longest 20% longevity will live well into our 90s.

Of course life is too short to ignore meaning at any age. But for many people 50 is a milestone that reminds us to stop and reevaluate. There is still time for a whole new life of significance.

If we've been careful in our savings we could retire at age 50 and pursue a new calling regardless of its potential pay. We could retire at age 50 if we could live off 3.64% of our net worth. To retire with a $100,000 per year lifestyle we would need $2.75 million.Financial independence can open exciting possibilities that were otherwise out of the question. If we don't need the money, we are free to do anything with our lives. People of purpose usually don't choose 28 years of recreation. Not when we finally have the time and the wisdom to make a difference in the world.

Counting retirement as a new career is a perspective we encourage. Beth Nedelisky and I teach an Osher Lifelong Learning Institute course each spring, "Financial Planning for Success and Significance in Retirement." In the first class we explore finding meaning in retirement and defining success. We use Marc Freedman's book "Encore: Finding Work That Matters in the Second Half of Life" in the class. His book encourages everyone passing 50 to find their calling in the second half of life and focus on what matters most.

I asked Freedman what he considers the most significant aspect of those over 50 finding a calling for the second half of their life. He answered, "When you reach the point in your life where you can celebrate the freedom to work instead of the freedom from work, that’s success. If just a fraction of people in the second half of life turn their experience, time and talent to our nation’s most pressing challenges, imagine the progress we could make."

Although you can have that attitude at any age, it is especially powerful when redefining the second half of life.

September 24, 2010

Welcome to the Oct 2010 issue of the Free Money Finance e-newsletter!!!!!!

Newsletter Giveaways

I have three newsletter exclusive giveaways this month. Below there are links to each of the giveaways (made known only to readers of this newsletter). Click on the link(s) of the giveaway(s) you want to enter and follow the directions there. Prizes include:

Would you please consider doing me a favor? I'd certainly appreciate it if you'd tell your friends, family, co-workers -- anyone you know that wants or needs personal finance information -- about Free Money Finance. Simply let them know that if they would like to receive free, daily suggestions on how to grow their net worth, they can subscribe to Free Money Finance using their feedreader and this link. Or to get daily email updates, they can use this link.

Thanks!!!

Facebook

If you want even more personal finance articles/information, then "like" FMF on Facebook. I post there on weekdays and include pieces I feel are good and yet don't make it on Free Money Finance for one reason or another.

Thanks for subscribing to this newsletter and good luck in the giveaways!

Welcome FMF newsletter readers! Here's a chance for you to win a $50 gift card from SmartyPig -- given either as a credit to a current account you have with them or as credit to a new account that you'll set up.

Here's how it will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. In a week or two, I'll select the winner at random and announce the winner on this post.

3. I will email the winner, get their contact information, and arrange for them to receive their prize.

Welcome FMF newsletter readers! Here's a chance for you to win a box of seven personal finance books (they are detailed here). FYI, some may be slightly used and/or have notes in them (these were sent to me as review copies), but most are in generally good or even new shape.

Here's how it will work:

1. All you need to do to enter is to leave any comment on this post. Be sure to leave your email address (no one else will be able to see it) when you leave the comment.

2. In a week or two, I'll select the winner at random and announce the winner on this post.

3. I will email the winner, get their contact information, and arrange for them to receive their prize.

Many investors are just convinced that their investment portfolios should always go up. When returns don’t meet these unrealistic expectations, they tend to throw in the towel and give up. It’s a mistake to sell good investments just because they are having a sluggish year or struggling through a bear market. You need to invest with your eyes wide open, knowing beforehand what to expect from your investments in both bull and bear markets. In most cases when your investments take near-term dips or fluctuate with the market, you should stay invested and hold on.

Most investors ask only one question before buying a portfolio of investments, “What will my return be?” Usually, they answer this by looking at recently posted one-year returns. Stopping at this question will likely leave you disappointed at some point during your investment journey.

In addition to knowing what the returns of your investments have been recently, be sure to ask the following:

What has the portfolio returned on average over the past one, three, five, and ten years?

What was the best and worst three-month period during the past ten years?

What was the best and worst one-year period during the past ten years?

What was the best and worst three-year period during the past ten years?

How has the investment performed during past wars, bear markets, terrorist attacks, and elections?

Once you know the answers to these questions, you can now ask yourself an even more significant question: “If I want the long-term returns this investment or portfolio can produce, can I withstand the volatility?” Without understanding this risk from the onset, volatility will likely get the best of you somewhere down the road. See the asset allocation chart in to examine the ups and downs of various mixes of stocks, bonds, and cash.

Let’s investigate the market’s ups and downs during different periods. Figure 10.6 (not shown here) shows the worst one-year results for different segments of the stock and bond markets from 1970 to 2008. You need to take downturns in context. For example, during the 1973-1974 recession large-company stocks fell 37 percent. An investor would have been shortsighted to sell a portfolio of large-company stocks after this poor performing year. In the following two years (1975-1976) large company stocks provided patient investors with 37 percent and 24 percent returns respectively. A $10,000 investment into an S&P 500 stock index fund starting in January 1970 would have grown to $340,573 by December 2008, a return of 9.5 percent per year. Other Figures review the stock market’s performance during various bear markets, wars, acts of terrorism, and elections.

Despite all the recessions, wars, terrorist attacks, and market crashes, the stock market has been an excellent investment over the long term. The key is to stay invested through thick and thin. When you invest in a portfolio of stocks and bonds, be aware of the potential upside and downside associated with your investments. If you don’t understand the risks at the outset, you are more likely to react poorly during periodic market setbacks and get scared out of the market.

When you buy an investment, you should plan on worst-case scenarios occurring when you invest. If you understand the risk from the outset, you are more likely to stay invested for the long term and realize solid long-term gains. It is true that past performance isn’t guaranteed to repeat, but it does give us an indication of what to expect.

Mistake 9: Focusing on Individual Investment Holdings Rather than Your Portfolio as a Whole

In 2008, I had a client, Marcus Ramsey, who each time we met to review his investments was convinced that he was going to go bankrupt due to the market’s tumble. Why was Marcus so concerned? One of his brokerage accounts was invested in some fairly aggressive individual stocks that were routinely getting hammered. He watched the value of this account drop 50 percent. Because of this one account, he was ready to sell every stock investment he owned and move to money markets and CDs. However, when we evaluated his overall portfolio, including the money he had in his bank, 401(k), IRA, brokerage accounts, and an annuity, we discovered just how well he was weathering the bear-market storm.

When we viewed Marcus’s total investment portfolio, we saw that only 30 percent of it was invested in stocks and stock funds; 40 percent of his money was invested in municipal bonds; and 30 percent was in money markets and CDs. The single aggressive account that caused him so much heartburn (and nearly persuaded him to give up on the stock market entirely) represented less than 1 percent of his overall portfolio.

So how did Marcus do? In 2008, when the stock market, as measured by the S&P 500 was down 37 percent, and the Nasdaq dropped a whopping 41 percent, Marcus lost 7 percent. While everyone else was losing sleep because of their stock losses, Marcus realized he could relax and his money anxiety went away.

If you are properly diversified, I can guarantee you that each year some of your investments will lag behind others in your investment portfolio. If you look at investments in isolation rather in context of your overall portfolio, you will be tempted to make poor decisions. You may get yourself into trouble by getting rid of investments when they’re low in value and replacing them with those that just experienced success. This leads to buying high and selling low. This is often a mistake made by investors who gauge their entire portfolio by the performance of just one account or one investment.

So remember, evaluate your portfolio as a whole rather than by its individual pieces.

Mistake 10: Lack of a Clearly Defined Investment Strategy

Let’s imagine for a moment that you are in charge of investing the $100 million in your state’s retirement pension plan. The money will be used to provide pension incomes and other benefits to thousands of employees who have diligently worked for the state. These employees are counting on you to make good investment decisions to help secure their financial futures. What steps would you take to make sure this money is managed properly?

Most likely you would begin by developing an investment strategy that outlines your objectives and the parameters you will follow as you make investment decisions and manage the money. Then you would use the services of institutional money managers to handle the day-to-day buying and selling of stocks and bonds. You would likely interview many financial professionals, hire the best ones, and then monitor their performance very closely.

Picture yourself in one of these interviews. You would no doubt ask lots of specific questions about each manager’s investment strategy and how successfully each has managed money. How much confidence would you have in a candidate who answered your question with this statement?

“Well, our investment management company doesn’t really have a strategy. We usually read Money magazine and look for hot tips. We always watch CNBC and often get good investment ideas there. Sometimes we even look on the Internet for investment ideas. On occasion, I talk to my doctor or father-in-law to get their thoughts and ideas. We buy a little here and a little there and hope the investments work well and complement each other. Once we purchase the portfolio of investments, we go to the Internet to obtain stock quotes several times each day. When it feels right, we sell. It’s kind of a gut feeling we get. I think you will be happy with our investment management services.”

How much of your state’s $100 million are you going to trust with this money manager candidate? It’s safe to say you would usher him out of your office as quickly as possible.

You are the money manager of your own money. Now, put yourself in the hot seat. How would you respond if asked, “What strategy do you follow in managing your own portfolio?” All too often, investors respond the same way the money manager did in our previous example. If your investment strategy consists of hot tips from television, the Web, and the guy next door, how successful will it be? Can you effectively manage your own money? Not without a well-defined and disciplined investment strategy.

Just as you wouldn’t hire a money manager lacking a clearly defined investment strategy to oversee your state’s pension, you shouldn’t manage your own money without developing a similarly disciplined strategy. A strategy doesn’t work unless it has structure and is carried out with discipline. Investors who do not follow a disciplined investment strategy continue to repeat the same costly mistakes mentioned in this chapter.

Now, more than ever, the size of your retirement nest egg will heavily depend on your ability to turn yourself into a good investor. By following the steps that will be outlined in the subsequent chapters, you will significantly magnify your chances of attaining sound returns and living a secure retirement.

September 23, 2010

The following is a guest post from Miles Walker, a freelance writer and blogger who usually compares car insurance deals over at Car Insurance Comparison.

Maintaining the value of your car is an important aspect of car ownership especially if you wish to protect the investment that you have in your car. Here are the best ways to maintain the value of your car.

Mileage

While most of us purchase a car to drive it, adding up excessive mileage on your vehicle can work against you when it comes to resale time. You should avoid unnecessary mileage that may affect the resale value of the car. Carefully plan long trips and compare the cost of a rental vehicle against the loss in value that excessive mileage may cause. This will help you find the balance between driving the car to meet your needs while keeping tabs on how mileage will affect the bottom line at resale time.

Service and Maintenance

Keeping your vehicle regularly serviced will not only provide you with a reliable vehicle but it will also be beneficial to you at resale time. Maintaining service records, performing regularly scheduled maintenance as outlined in your vehicles car guide, and addressing repairs promptly will keep your vehicle in top shape and will help sustain the value of your car. The basic maintenance such as oil changes, tire rotation, brake replacement, and other things will help keep the vehicle running for a long time. A well-maintained vehicle is one of the key factors that a prospective buyer will desire when it comes time to sell or trade-in your vehicle.

Cleaning Your Car

After servicing, cleanliness is the next most important factor to help maintain the value of your car. Exterior cleaning should be done regularly especially if road grime, bug tar, bird droppings, tree sap, and other things are found on the surface of your vehicle. A good washing and waxing on a regular basis will help maintain the paint and exterior surface of your car. Having your car detailed where a more extensive cleaning and maintenance job is performed will help maintain the appearance and value of your car. Keeping the interior clean and refraining from eating, drinking, and smoking in your vehicle will help maintain the interior finish. Cleaning up spills and stains immediately is a must. The appearance of a vehicle at resale or trade-in time is a key factor among buyers and will greatly affect the value of your car.

Driving Style

Hard driving that includes quick take-offs, hard braking, extreme speeding, driving in places where there are poor road conditions, and subjecting your car to other bad conditions can take a toll on your car. This leads to the need for repairs and extra maintenance and will ultimately lower the value of your car. Excessive wear and tear is not a favorable way to maintain the value of your car.

Storing Your Car

The paint job on your car is very susceptible to elements that nature can dole out. It can also be affected by pollution and other things that may affect it if is housed outdoors. Having it kept in a garage or other type of shelter is key to maintaining the value of your car. In climates where the hot sun or extreme cold is prevalent, having your car stored in a garage or other shelter will help protect the exterior paint, molding and trim from fading and other damage. Cold weather can also be very harsh on the engine and other mechanical parts of your car.

Avoid Excessive Customization

Since beauty is in the eye of the beholder, when it comes to maintaining the value in your car, the value is based on what a prospective buyer will pay. If you have an overly customized car that has been dressed up to appeal to only your tastes, you may not be able to achieve the value of the customization when trying to sell it someone else. The extra customization may also change the overall appearance and functionality of the car making it harder for a buyer or dealer to determine what the basic value of the car may be.

Avoid Accidents and Collisions

A vehicle with a history of accidents and collisions will not maintain the highest resale value. If an accident does occur, ensuring that you use a reputable body shop for the repair work will help maintain the value of the car. Addressing minor damage immediately such as windshield nicks and cracks and dings and scratches to the exterior will go a long ways towards maintaining the value of your car. At resale time, the owner should also disclose any body work or collision repairs that have occurred so that the buyer will feel confident about the extent of the damage to the car.

Treating Your Car As An Investment

While depreciation of your car is inevitable, you can make an effort to maximize its value by treating it as an investment. This may include limiting who drives your car, watching where it is parked, and any other things that are necessary to protect your car. By keeping your car in top running condition and with the best appearance, you will be able to maintain the value of your car.

The other night we were headed back from car shopping and needed a quick meal. I suggested we pick up a new Big Italy pizza from Pizza Hut. We had just seen one advertised on TV and it looked great. It's billed as three toppings on an "almost 2-feet" in length pizza for only $12. What's not to love, right?

So we ordered one, picked it up, and took it home. Here's what's not to love:

It looks big on TV, but isn't that big in person. I'm estimating that it's the size of 1 1/4 large Papa John's pizzas. We normally get two of those for $12. It was the first time in a long time that we had eaten the entire pizza and wanted more. In short, it just wasn't big enough.

Too much and not enough dough. Too much dough on the corners (there were pieces that were almost all dough) and not enough in the center (there was barely anything to hold the meat and cheese on the pizza -- and what was there was soggy.) Yuck!

They charged us $12.99 versus $12. Not a big deal, but we called and the cost was not as advertised on the site and TV. Didn't find out why, but it made the total cost closer to $14.

Overall, not a great experience and one we won't be reliving again. Just thought I'd pass my opinion on to you. As always, your mileage may vary.

They can't afford to do this because they have too much debt (mortgage, home-equity loan, auto loan, and credit cards.)

They need to cut debt by $500 a month and other expenses by $1,300 to make the finances work.

The mom says, "We really have to think about it."

What????????!!!!!!!!

Let me be a bit more clear: these two make a great income -- over $100k even with the wife's salary reduction -- but they can't afford to live on that amount. Now their hopes and wishes for their family are put on hold because they haven't been able to control their spending and show no signs of wanting to start.

Now the one thing not mentioned is what part of the U.S. they live in. As we all know, $100k in St. Louis goes a lot farther that $100k in New York. That said, if cost of living is beating them down, I just have three comments:

2. No matter where you live and what you earn, you still have to spend less than you make. It's simple math.

3. $100k is a decent salary even if they live in a costly city. Granted, it's not a wonderful salary for people living in costly cities like Boston, San Francisco, etc., but it's certainly not poverty level either.

In short, they have over-spent and now have so much debt that they can't live like they want to. And unfortunately this seems to be more of the rule than the exception in America today -- people simply spend way too much. Don't believe me? Then check out the low median net worths in America today and then tell me what you think.

September 22, 2010

I've received numerous emails and comments on past posts about updates to the Schwab 2% Visa card. Readers have been getting letters saying that as of September 30 Schwab is no longer supporting the card and that FIA Card Services will be taking over theaccounts. The letter doesn't say anything specifically about the rewards, but the speculation is that the 2% reward will drop to 1% as FIA Card Services makes it a "basic" rewards card (and as I understand the card's structure, it's always been a 1% cash back card with Schwab kicking in the extra 1% -- now Schwab goes away and it just seems very likely that the card will be a 1% card.)

A few comments on this situation:

1. Many of you have asked if I've received my letter yet. No, I haven't. But I've been out of town a couple days and will have three days' mail waiting for me when I get back home tonight. Perhaps it's in there.

2. Thanks for the advance notice, Schwab. If the card really does change over on September 30, they've given us basically no time to make alternative plans. Nice customer service, huh?

3. I think Schwab's image will take a hit on this one. I had been a Schwab customer in the past and had moved away from them because their fees were way too high compared to alternatives (that may not be the case now, but I haven't checked lately.) I opened an account with them once I got the card, I liked it, and they were starting to win me back as a customer. If they kill the card, they've killed their chance with me for a loooooong time.

4. I still have the Amex Blue card as my back up, but it works best when you can load a ton of charges up on it over the course of a year. It won't do me much good at this point.

5. Auto payments, ugh. Schwab had just changed my account number (for some unknown reason -- perhaps to make the transition to FIA Card Services easier) so I recently contacted all the companies I have set up with automatic bill-pay to my card (to give them my new number.) Looks like I'll need to do that again (I'm assuming I'll need to get a new -- better -- card.)

And those get us to the big question: what's the new "best" cash back credit card? I put "best" in quotes because much of the answer depends on how an individual uses a card -- what he buys, where he buys it, how much he buys, etc. The answer is also dependent on whether you like a one-card strategy (like I do -- I don't want to carry a boatload of cards with me) or are willing to deal with multiple cards to give you the best total return (you will get a better return with more cards, but you also will have more hassle. And if you're managing cards with more than one person -- like I am, my wife uses them too -- communicating and executing a multi-card strategy can be difficult.) Let's assume for now that we're looking for the "best" option for a one-card strategy. What would you suggest as the card we all should consider?

Individual investors are famous for buying last year’s winners. Guess which mutual funds attract the most new money each year? You got it; money flows into mutual funds that have just enjoyed the greatest performance in the previous year. In 2007, for example, investors poured more than $208 billion into international funds, the asset class with the greatest performance in 2006. The returns of the three international funds that brought in the most assets in 2007 provided returns 10 percent higher than the U.S. stock market in 2006. In 2008, however, these same three funds on average lost 42.96 percent. International funds were the worst major equity asset class in 2008. In other words, investors who chased market-beating returns in 2008 got soundly beaten by the market.

It shouldn’t be surprising that chasing returns is a very common investor mistake. There’s an entire financial media industry built around one simple theme: “Don’t Miss Out on the Ten Hottest Stocks,” or some variation of it. For many investors, the lure of phenomenal past returns is just too tempting to pass up. This allure leads to critical mistakes.

For example, in 1999, the Nicholas-Applegate Global Tech I Fund posted an unbelievable 494 percent return, and investors saw instant riches parading before their eyes. An individual investing in this fund at the start of 2000, however, experienced the following returns: -36.37 percent in 2000, -49.26 percent in 2001, and -44.96 percent in 2002. At the end of three years, a $10,000 investment was worth just $1,777.

When the fine print says “Past performance is no guarantee of future returns,” believe it!

Mistake 5: Believing Persuasive Advertising Messages

Many brokerage firms advertise in order to convince you how easy, enjoyable, and inexpensive it is to delve into the stock market and make big money. In fact, the brokerage industry spends hundreds of millions of dollars each year on TV commercials persuading us that it’s easy to be a success in the market.

The most classic example is the series of Stewart commercials run for a large brokerage firm that was touting its online trading system. You may remember Stuart? He was that red-headed, punk rocker who taught us and his boss how easy it is to make money in the stock market. Stuart advised that all you had to do was open an online account, start trading, and watch the money roll in. As Stewart said in the commercial:

“I don’t want to beat the market. I wanna grab it, sock it in the gut a couple of times, turn it upside down, hold it by the pants, and shake it ’til all those pockets empty out the spare change.”

Although the Stuart commercials, like many ads for the investment houses in the late ’90s, were hilarious, they did more damage than good. In fact, the commercial is even funnier in hindsight. In one of the 1999 commercials Stewart recommends that his boss buy one hundred shares of Kmart stock. In 2002 Kmart filed for bankruptcy, and the value of the stock subsequently went to zero. We don’t see Stuart talking about investing anymore, probably because he lost his shirt in the 2000–2002 recession. He learned the hard way that there is more to developing a solid investment strategy than merely opening an online brokerage account and trading.

No question about it, buying and selling stocks can be exhilarating. Many investors roll up their sleeves and play with their money, checking stock prices and market values throughout each day. While this may be a great form of entertainment, most discover it’s also a successful formula for losing money.

Rarely a day passes when a brokerage firm isn’t telling Americans that they can trade stocks for as little as $5 to $8 per transaction. Think about it. By offering such cheap trades, these firms have to make up for it by dealing in quantity. Their goal is to have you trade as often as possible without concern for cost. What they don’t tell you is what it’s really costing you. As we’ve seen, hyperactive trading equals poor performance.

Mistake 6: Poor Diversification

Investors tend to be concentrated in one or two companies or sectors of the market. Overconcentration can hurt a portfolio, whether the market is performing well or poorly. Poor diversification leads to excessive volatility, and excessive volatility causes investors to make hasty, poor decisions.

Suppose in 2008 you had placed the bulk of your portfolio in a big company like Lehman Brothers (-99.18 percent), AIG (96.24 percent), General Motors (-86.86 percent) or Citigroup (-73.40 percent). That year, you would have watched your portfolio head into an unrecoverable tailspin. Many Lehman employees invested a large portion of their retirement plan money in their company stock. You are probably thinking, “Who would invest the majority of their nest egg in just one company?” Surprisingly it is fairly common. A little more than one out of every ten people who have the option of buying shares of their company stock in their retirement plan have invested at least sixty percent of their retirement plan money in their company stock. People who had concentrated the bulk of their portfolios in these companies saw values drop to almost zero. Many were left with no other option but to start from scratch and begin rebuilding an entirely new portfolio.

You would think we’d learn. Many investors who got caught up in the technology craze of the late 1990s suffered a similar fate. Staggering amounts of money poured into technology mutual funds as investors bulked up their investments in this single market sector. This lack of diversification proved fatal for technology investors when the average tech fund fell 30.7 percent in 2000, another 35.2 percent in 2001, and another 42.73 in 2002. By comparison, a well-diversified growth portfolio consisting of 80 percent stocks and 20 percent bonds would have fallen just 4 percent in 2000, 8 percent in 2001, and 13 percent in 2002. When volatility is controlled, it’s easier for investors to maintain a long-term investing outlook.

Another lesson from history shows that poor diversification even takes its toll during rising bull markets. In 1999, the S&P 500 Index recorded a 21 percent return. However, just eight of the 500 stocks in the index accounted for half of its 21 percent gain. The odds were stacked against the investor who bought just a few S&P stocks during 1999. The chances of an investor successfully choosing those eight big winners out of 500 would be a little better than winning the lottery. Most investors would be far more successful by simply diversifying, buying an S&P 500 Index fund, and owning stakes in all 500 companies.

Mistake 7: Lack of Patience

Most mutual fund investors hold their funds for only two or three years before impatience gets the best of them. Individual stock investors are even less patient, turning over about 70 percent of their portfolios each year. You simply can’t realize good returns from the stock market if you invest for only weeks, months, or even a couple of years. When investing in stocks or stock funds, investors must learn to set their investment sights on five- and ten-year periods.

Investors would do well to study the example of the CGM Focus fund, which has the best ten-year annual return for the period ending June 30, 2009, as measured against all large-company U.S. stock funds. During that decade, this stock fund provided investors with a stunning annual return of 16.03 percent. A $10,000 investment in the CGM Focus fund would have grown to $47,250 during this period. Most investors, it’s safe to say, would be very happy with this performance. However, it didn’t deliver huge returns every single year. In fact, during that 10-year period two years were pretty rough, losing -17.79 and -48.88 percent. An investor would have had to endure these two negative years (years when an FDIC bank account would have done much better) to gain the 16.03 percent long-term average annual return. Patient investors were rewarded.

Anne Scheiber is a model of patience that all investors should emulate. She retired from her $3,150-per-year IRS auditor job in 1943. At that time, she invested $5,000—a little over one year’s salary—into a portfolio of stocks. Over the years, she bought and held mostly blue-chip U.S. stocks and some municipal bonds. She didn’t worry about daily market fluctuations and rode out the difficult market periods. When Anne died in 1995, at age 101, her $5,000 had grown to more than $22 million, which she donated to a Jewish university. Patience was at the core of Anne’s stunning investment success.

Said another way, I recently heard a radio host use this phrase about how to become wealthy:

Steady plodding brings prosperity.

Both statements are very true. If you want to become wealthy, the most tried and true way is to "save your money over multiple decades." Of course you can always speed up the process by earning more and/or saving more. But the key to becoming rich is pretty basic -- spend less than you earn over a long period of time.

For those of you who don't have the time and/or patience to become wealthy over 40 years or so, here are my suggestions for cutting "multiple decades" down to "two decades" (though technically, two decades are still "multiple" decades):

Max Haley has been investing in the stock market for the past twenty years. In 1989, at age forty, he started with $50,000. Since then, he has invested in a number of individual stocks and stock mutual funds. Max prides himself on his “investment expertise.” To determine what stocks and funds to buy, when to buy, and when to sell, he reads Money magazine, subscribes to The Wall Street Journal, frequently visits investment Web sites, and tunes into CNBC several times each day to obtain stock prices and reports.

So how’s he doing? By the end of 2008, his investment had grown to $114,532. Max’s annual return was a meager 4 percent. Had Max simply invested his $50,000 into a balanced stock and bond mutual fund and never looked at it again for the twenty years, he would have more than doubled his returns and ended with $245,118.

If Max retires and wants his nest egg to last thirty years he can withdraw only $6,400 each year. If he annually withdraws 6 percent of his hand-picked portfolio it will kick off about $10,000 per year. If he had simply invested in the balanced fund, assuming returns similar to those the fund produced in the past, he could pull out $20,500 each year. What’s really surprising about his performance is that Max’s 4 percent annual return was better than what the average U.S. stock investor earned during this same period!

After applying so much effort, why did Max do so poorly? Max, like most individual investors, was guilty of making ten mistakes. Had he read and applied the lessons you’ll learn in this chapter when he started in 1989, he likely would be sitting on a much larger nest egg today.

Mistakes Will Cost You

And no doubt about it: You will need a large nest egg to retire on. Social Security is under pressure as more and more baby boomers start tapping into the system. Companies are eliminating traditional pension plans. More than ever before people need solid returns from their own investment portfolios in order to produce a livable retirement income. Plain and simple, your success as an investor may well dictate whether or not you reach your retirement goals.

In the future, savings and investments will take on an even greater importance. This is a huge problem for most retirees. Why? Because most people—including, most likely, you—simply don’t invest very well.

A twenty-year investor study dramatically illustrates the grim lack of success many investors have experienced. According to the study, the average stock-fund investor achieved returns of only 1.87 percent a year from 1989 through 2008. Had these same investors simply invested their money in the S&P 500 Index (composed of large U.S. company stocks) and forgotten all about it, they would have achieved an 8.35 percent annual gain. Even bonds beat most investors, growing 7.43 percent per year. The stock market provided results almost five times better than those experienced by millions of stock mutual fund investors! It should have been easy for even the average investor to make substantial sums of money over this period of time.

Consider for a moment the difference between an investor earning an average annual return of 1.87 or 7.43 percent as opposed to an investor earning an 8.35 percent return.

Over the long run, even during bull markets, most investors struggle to obtain performance better than low-yielding investments, like money markets and certificates of deposit, because they make common investor mistakes. How is it that investors do so poorly at times when investments are doing so well? No single mistake explains this poor performance. Rather, there are a combination of errors repeated over and over—mistakes that can be overcome by simply implementing and adhering to a disciplined investment strategy. (Developing a strategy is discussed in the following chapters.)

In this chapter, you will learn that it’s possible to obtain good long-term returns by avoiding the obstacles that plague so many investors. By avoiding common mistakes, you will be in a better position to reach your retirement goals. Here are the ten most common investor mistakes.

Mistake 1: Excessive Buying and Selling

Like the amateur chef that continually seasons food until it’s inedible, investors who are overactive in their trading undermine their goals.

A study of more than 66,000 households with investment accounts at a well-known brokerage firm found that investors who traded most frequently underperformed those who traded the least. For the study, the investors were split into five groups based on their trading activity. The returns achieved by the 20 percent of investors who traded the most lagged behind the least active group of investors by 5.5 percentage points annually.

Another study showed that men trade 45 percent more actively than women, and consequently, women outperformed men.

Many investors make the mistake of thinking that the more often they trade, the better their returns will be. The advertisements aired by many discount brokerage firms promoting active trading want you to believe this is true. However, the evidence suggests exactly the opposite. So sit back and relax!

Mistake 2: Information Overload

Too much information can be dangerous to your wealth.

Not long ago at the beginning of an investment seminar, I asked the audience how many knew the previous day’s closing level of the Dow Jones Industrial Average. Many hands went up, and these “smart” investors had no difficulty citing the index’s closing value.

Then I asked who in the audience didn’t have a clue where the market had closed. Timidly, a woman with very little investment experience raised her hand. The crowd was surprised as I handed her a $20 bill. I explained that investors who rarely check the market and the value of their investments keep more of their money invested in stocks, thus they often obtain better long-term results. Those who monitor the market too closely have a tendency to undermine their portfolios with self-destructive behavior.

What role should information play in your investment decisions? University of Chicago Professor Richard Thaler, the father of behavioral economics, conducted an experiment to see how much investors would allocate to stocks and bonds based on how often they reviewed their investment performance. Three simulations were developed, each representing a different frequency of investors reviewing their portfolio performance over a twenty-five-year period.

Those participating in the study were assigned to participate in one of three simulation groups. Group A was bombarded with investment performance information. Their test simulated the experience investors would have if they looked at the performance of their investment portfolio every month for a twenty-five-year period. Group B received performance information replicating the scenario of looking at their investments just once each year. Group C received investment updates only once every five years. Which group do you think did the best?

The investors who received the most performance information allocated the smallest amount of their portfolios—about 40 percent—to stocks. They not only maintained the lowest equity exposure but tended also to sell stocks immediately after a loss. The group that received updates only every year devoted 70 percent of their portfolios to stocks, while those who received performance information every five years invested 66 percent of their portfolios in stocks. And, as we all know, based on the history of the market, investors with greater exposure to the equity markets have enjoyed far better long-term performance than those with lesser exposure.

The bottom line: The more closely investors follow the market, the more tentative they become about investing in stocks, which ultimately hurts their returns.

The solution? Develop a fundamentally sound investment strategy and maintain your stock allocation through up and down markets. Stay away from financial sites on the Internet, turn off CNBC, consider canceling The Wall Street Journal, and quit worrying about your investments every day. Professor Thaler said it best: “My advice to you is to invest in equities, and then don’t open the mail.”

Mistake 3: Market Timing

History has shown that the stock market rises about 70 percent of the time. The danger, when investing, is in finding yourself out of the market during the 70 percent of the time it’s going up, all because you’re trying to avoid the 30 percent of the time the market is falling.

Trying to choose the right times to jump in and out of the market is an impossible task. Too many investors make the mistake of thinking they can do it. Investors attempting to time the ebbs and flows of the market tend to jump in too late, missing major upswings, and jump out after the market has fallen. Consequently, many investors end up buying high and selling low, yielding poor results that often lead to the kind of frustration that keeps investors out of the stock market altogether.

If you had invested in the S&P 500 from 1984 to 2008, covering 6,306 trading days, you would have enjoyed a 7.06 percent annualized return. If you had missed the market’s forty best days, your annualized return would have been cut to a negative 0.93 percent! There’s a dramatic difference between an investor who spent 6,266 days invested in the stock market and another who stayed invested all 6,306 days. There is a huge price to pay if you mistime the market.

Market timing is typically driven by emotion. Investors are notorious for buying stocks when they feel good and selling when they feel bad. Think about this; you feel good once the market has run up 20 percent or more and you feel bad when your portfolio is down 20 percent. With the “feel good/bad” investment strategy, you will always buy after the market has gone up and sell when the market has taken a big fall. The biggest days in the stock market normally occur early in a recovery. So if you pull your money out of the market when it’s down and hope that you will be smart enough to get back in the day it hits the bottom and starts to climb, the odds are stacked against you. And if you are late you will likely miss the best days. Following the “feel good” strategy will lead you to poor returns.

An increasing number of employers, scared by ballooning employee waistlines and health care costs, are betting they can entice workers into healthful habits with incentives such as cold, hard cash -- up to $2,500 in some cases -- and friendly competition among co-workers. Some also offer lower insurance premiums for people who drop weight, lower their blood pressure or bolster other indicators of fitness.

Here's how one school district does it:

Let's say you're a teacher and you sign up. You're sent a high-tech pedometer that you can wear all the time: walking the dog, jogging, strolling around the block. A few times each week, you plug the pedometer into any computer; an online program tracks the number of steps you've taken, along with other information.

You earn points for your steps. For instance, 7,000 steps (about three and a half miles of walking) earns 60 points for that day. "The more you walk, the more points you get," Eutsler says. You get points, too, for other things: getting your blood pressure, weight and body mass index checked at special stations; hitting your targets in those categories; even for logging on to the health website.

Accrue enough points to hit certain goals, and you'll get a reward -- usually cash or a gift card. For instance, in Harlandale's case, reaching the easy Level 1 requires 6,000 points and earns $25. By the time you've reached the fifth level, which takes about three months and 36,000 points, you've earned $150.

Personally, I LOVE, LOVE, LOVE this idea. But I'm an exerciser anyway, so I do it for "free." But if you paid me (or lowered my medical insurance), I might do even more. ;-)

A couple jobs ago I worked for a company that paid your health club membership if you went two times per week on average (they knew who went because every member had to sign in and out every time they went to the club.) It was a good perk since the club was VERY nice. My current employer doesn't offer incentives for exercising, but did recently build an exercise room onto our building so it's ever-so-easy to work out. Again, a very nice perk.

In general, I like the idea of rewarding those who do the right thing and punishing those who don't (paying those who exercise and making those who don't take care of themselves pay more for medical coverage in this case), and the more we can provide economic incentives like these, the better IMO.

A couple of interesting situations have occurred in my life recently. Since they are related and deal with money, I thought I'd share them in one post.

The first is the number of people I have run into that have "cottages." For those of you who might not be as familiar with the term, here's a brief review:

In Michigan, there are about four (maybe five) months of really great weather. As such, when the weather is nice, people want to be outdoors.

Many people prefer to be outdoors in a wooded or semi-wooded location that's at least somewhat remote.

As such, a good portion of the population here owns a "cottage."

Contrary to my initial thoughts, a cottage isn't (usually at least) a 50-year-old, one-bedroom shack without running water or indoor facilities. Quite to the contrary, a cottage is more likely to be a "regular" house -- just one that is located in the woods, on a lake, or in some other scenic location, generally "up north" (in northern Michigan.) It's likely that this house is smaller than the home they live in most of the time (perhaps it only has two bedroom and one bathroom rather than four bedrooms and three bathrooms.) But make no mistake about it, it's a house.

Some people inherit their cottage from family (or even use a family-owned cottage.) Others buy one outright. Both spend most of their summer weekends "up at the cottage."

Now think of the financial implications of owning two homes (not to mention the time commitment). Even if someone gave you the second home (like a family member), you still have maintenance, taxes, utilities, etc. associated with another home that you have to deal with. And for those who have to BUY a cottage, this might mean TWO mortgages. Yikes!

Now throw this into the mix. Over the last few months, I've had several people who either are: 1) in financial difficulty, 2) have been in financial difficulty, or 3) who could be in financial difficulty (because I know what they make) tell me that they have recently purchased a cottage (i.e. a second home) or have mentioned that they have a cottage. Each time I've thought "how can these people afford a second home?" The likely answer, "They can't." (Some will say they got a "great deal" on one due to the poor economy, but who can afford two homes even if the second one is 40% off what it once was?)

Thomas J. Stanley recently discussed owning two homes. Some of his key findings:

Most millionaires can afford to purchase and maintain a vacation home. Yet, as I mentioned in Stop Acting Rich, 64% of the millionaires surveyed never owned a vacation home, beach bungalow or mountain cabin, not even a lean-to or a tree hut in the woods.

In 2006, the second home buyer had a net worth of approximately $380,000 and a median annual household income of $80,600. Are you thinking of buying "an affordable second home" because you want to emulate the behavior of most millionaires? Be careful. Most people who own second homes are not millionaires. Most millionaires rent instead of buying vacation homes.

Within the same age and income cohort, who is better at transforming income into wealth? Overall those who don't own vacation homes are more productive than those who do.

No doubt some second home buyers have enhanced their wealth by having another home. Yet far too often even investment driven buyers of second homes grossly underestimate the real costs in terms of buying, furnishing, maintaining, commuting to, renting and possibly selling a second home. Time is money. Place a high price on your time, all that time it takes to shop for a second home, set up utility related services, pay bills and hire people to maintain your home. Even renting your home takes time. And if you have a property management company handling and renting your home, you may pay up to 50% of the gross rent for this service.

There are a variety of reasons why millionaires don't own vacation homes. Most self made millionaires don't need to collect "things" to define and demonstrate their achievements. Also, most wealthy people have a wide variety of interests and activities. There is a substantial correlation between the number of interests and activities that people are involved in and their level of financial wealth. Some wealthy people feel that owning a vacation home would restrict them, obligate them to spend a lot of time there. And if they do not spend much time there they feel guilty spending lots of dollars on something that is underutilized. Most millionaires realize this without having to make the first mistake of purchasing a second home.

That's exactly what I thought.

Now look at the issue of spending on things most people can't afford in another way. My wife and I spend many summer evenings walking around our neighborhood. It's a nice, middle class neighborhood with several hundred homes in it. What do you think we find in driveway after driveway (other than multiple cars)? Yep. Boats. And I'm not talking row boats. I'm talking big power boats -- some so big that they barely fit into the driveway.

Again I'm thinking, can these people really afford these big boats (and all the expenses that go along with them). In many cases, I think the answer is "Not really."

Of course people can spend their money on whatever they like. It is their money after all. But I find it interesting that Americans have such low levels of net worth, are struggling with saving for college, are worried about whether or not they can retire (or if they'll have to work until they are 75) and yet they are bleeding money left and right on second homes and big boats.

And what's more sad is that fact that those of us who are financially responsible will be called on to care for many of these over-spenders later in life when they can't provide for themselves (have failed to save for their needs.) After all, it's only "fair" to help others, isn't it (at least that's what many in our government say)? I'm all for helping those who need help and are in trouble through no fault of their own, but I'm not too excited about helping someone who could have provided for themselves and chose instead to own a cottage, boat, or some other extravagance.

September 20, 2010

I know that you are a big proponent of being debt free even including mortgage, but I have some doubts about this method:I've always been a little confused by the notion of paying off your mortgage early. Because of inflation being typically at 3% per year, people will theoretically have more money (even though it will have less purchasing power) each year. Does it make sense to pay off everything within the next 15 years instead of paying the minimum for 30 years since you would theoretically have more cash overall and your mortgage payments do not go up with inflation?

And you could hopefully be investing all the money you're saving and earning more than your mortgage interest rate of 4.875? I wouldn't know how to go about calculating these scenarios, but I feel like if you invested the money, and earned a greater rate of return than 4.875 you would be better off than paying off your mortgage really early...

In a couple months I'll be speaking to a group on "Money Myths." The speech will focus on things that most people think are true about money but aren't (and there's some supporting evidence for this.) I don't want to have a "regular" set of "myths" that are really just tips (for instance, "debt is good" and "buying a home is always better than renting" my be untrue, but they are really just tips -- not something people believe deep down that are not accurate.) So I'm looking for things like these:

Myth: Smart people are wealthier.

Fact: Smart people do earn more on average, but there is no link between intelligence and wealth (net worth).

Why a myth: People like to believe that the wealthy became that way through some situation that most people (including themselves) can't replicate. It makes them feel better about their poor financial performance. In reality, most wealthy people got that way by hard work, spending less than they earned, and investing over time.

So you get the idea. But I could use some help from you. Namely:

Are there any other (more compelling?) myths you think I should add?

Is there anything here you think I should re-state or have wrong? (I'm just in the process of putting my thoughts together, so this is a very rough draft.)

Which of the above do you think are most interesting/something an audience would want to hear?

Dog walker: According to Professional Dog Walkers, you can earn up to $3,600 a month.

Pet groomer: Some groomers can make six figures a year, but it takes money to make that much because you have to invest in the equipment.

Pet masseuse: You can make money, but it'll take not only money but time -- you need to be trained.

Pooper scooper: Some members boast they make $100,000 a year for this unpleasant task.

IMO, there's a gold mine here. I'm trying to get my daughter to start developing "dog services" as a business (she loves animals) since I think she would do quite well with it.

Friends of ours regularly pay $40 per night to have their dog stay at a kennel (this piece quotes $15 to $35 a day). Even if you "only" charged $20 per day, you'd still earn a decent amount, save the owner a bundle, allow the pet to stay in its home, and save the owner the hassle of dropping off and picking up the pet at the kennel (which can cost an extra day's stay if the owners get home too late.) It's a big win for everyone!

Here's how it could work for us/others:

We have a few hundred homes in our development. Many of them have dogs. It's a built-in market very close to our home.

Let's say you could always have at least one dog being watched on average (sometimes you'd have none, sometimes you'd have several.) At $20 per day, this is $140 per week, $600 per month, and $7,300 per year. This would be a fortune for either of my kids!!!!

The $20 would get the pet checked on, let out for a bathroom break three times a day, and fed. That's it.

If the owner wanted other "services", they could be added on. For example, they could pay extra for a dog walk, to have their yard de-pooped (big money here -- if you're willing to do it), simple grooming/brushing, or extra checks/playtime with the pet.

In addition, non-pet services could be offered to the owner while he was gone. Some options: mail/newspaper pick up, cleaning services, etc. -- anything that you could do easily because you're already at the house.

Another option would be to charge more than $20 (say like $30) and include some services like one walk around the neighborhood and picking up mail as "free". Another option would be to have levels of services -- silver, gold, and platinum -- that the owner could select from.

Any extra pets would be an additional charge. Cats, fish, birds, etc. Personally I wouldn't sit for dangerous pets like snakes, but you could do that if you were ok with it.

As you can see, this could add up quite nicely for a responsible young adult or a stay-at-home parent to bring in some side income. Of course it would take some time to build up your business, but once things got rocking, I think you could do quite well.

What do you think? Anyone out there doing this now? Or maybe you're a pet owner and you pay for services like these (either in-home or at a kennel). What do you pay for this sort of service?

Towards the beginning of the book, the author contrasts how Jews and Christians generally view money differently. To do this, he quotes the New Testament (representing the Christian point-of-view) and contrasts it against some Jewish sayings/Scripture. A summary:

According to the New Testament, the Christian world has, at best, an ambivalent attitude toward money and wealth:

"Again I tell you, it is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God." Matthew 19:24 (New International Version)

"No servant can serve two masters. Either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve both God and Money." Luke 16:13 (New International Version)

"But if we have food and clothing, we will be content with that. People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction." 1 Timothy 6:8-9 (New International Version)

"For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs." 1 Timothy 6:10 (New International Version)

Let's stop here for a minute because I have several comments to make on this line of thinking:

The author is picking out verses at random that support his point of view (I could pick out several promising wealth in exchange for giving). He needs to look at these verses in context as well as in relations to the rest of the things said about money in the New Testament.

Christians don't only read the New Testament but the Old Testament as well. Therefore to simply make a case for what Christians think about money based on the New Testament alone is misleading.

Personally, I don't think the author has studied/read the New Testament very much and probably has little basis for quoting it with any sort of knowledge. Why do I think this? he doesn't even know there are two books in the New Testament named "Timothy." He lists the verses quoted above as simply "Timothy 6:8-9" and "Timothy 6:10" when any second grader can tell you the correct listings are "1 Timothy 6:8-9" and "1 Timothy 6:10" (that same second grader can also tell you that there's a difference between 1 Timothy and 2 Timothy in the New Testament.)

These things said, I don't doubt that his following thoughts about Jews are accurate (this is where his expertise lies.) All I'm saying is that to represent Christians based on these verses is not very accurate.

The author goes on to say the following:

For Jews, on the other hand, wealth is a good thing, a worthy and respectable goal to strive toward. What's more, once you earn it, it is tragic to lose it. Judaism has never considered poverty a virtue. The first Jews were not poor, and that was good. The Jewish founding fathers, Abraham, Isaac and Jacob, were blessed with cattle and land in abundance. Asceticism and self-denial are not Jewish ideals. With your financial house in order, it is easier to pursue your spiritual life:

"Where there is no flour, there is no Bible." The Mishna (a collection of books that outline the detailed laws for daily Jewish living)

"Poverty causes transgressions." Hasidic folk saying

"Poverty in a man's house is worse than fifty plagues." The Talmud (a collection of Jewish books of rabbinical commentary on the Old Testament)

I'm not sure why he didn't quote the Old Testament itself -- there's plenty in it to support his line of thinking (especially in Proverbs), but I guess he gets his point across as is: that Jews view money as being good and they act accordingly. As such, they are generally better off than the average Joe.

Stay tuned. We'll get into some specifics on the seven keys to Jewish success/wealth next Sunday.

September 18, 2010

So you just recently graduated from college, and now, all of sudden, a whole new set of responsibilities have been foisted on you from the Real World. You were probably mostly on your parents' dime, and so spending money wasn't as much of a concern as it is now. Before, your parents would send you cash, you'd spend however you saw fit, and then you'd hold on tight until next month's allowance. Maybe you even had a part time job that would enable you to splurge on nicer dinners out or drinks with friends.

Once recent grads get jobs, however, we have to start thinking about the ever-elusive future, and that includes investing and dealing with debt. As someone who graduated from not too long ago, here are a few tips.

1. Save at least 10% of your income.

Chances are, as a recent college graduate in today's job market, you aren't making a whole lot of money, although you certainly have much more disposable income than you've ever had before. The first few months of my job, I was astounded by how quickly I went through it all, simply because I wasn't used to having that much money in my bank account. Even if you don't earn very much, saving a mere ten percent is easy, if you're conscientious about it. It's a good start before you begin looking into investment options.

2. Student debt? Try to pay it off as soon as possible, and pay more than minimum.

Most student loans have a six to nine month grace period, allowing recent grads some time to be gainfully employed and get their finances in order before paying back. However, if you find yourself with a job right after college, and you can afford it, start paying immediately. That way, you won't be having to deal with increasing interest rates later on. Most student loans have a very small minimum monthly payment. If you can pay a little more, then by all means do so. The faster you get out of debt, the better.

3. Consider moving back in with your parents temporarily.

I know. The prospect sounds terrible, but if your parents will have happily take you in, and you aren't one who needs absolute privacy, then consider moving back with the family, if only to get a very large jump start on saving and paying off debts. The advantages are numerous, since you'll be paying little or no rent, you'll be tempted to eat out less, and you'll generally be saving a lot. Some may call this free-loading, and certain situations, this may be true, but saving thousands of dollars in rent will enable you to get started on building a nest egg quickly.

4. Look at novice investment options.

While the prospect of investing may seem daunting, especially if you have little knowledge about markets, start looking into it as early as possible. There are several guides online that help young investors navigate the world of stocks, funds, and equities. A great recent article in the Wall Street Journal, Investing Advice for New Grads, asks several experts what would investment options they would advise for novice investors.

Above all, make the most of your youth. As a young person, you can take more financial risks with investing, with the prospecting of larger returns over the long run. You also won't have as nearly as much debt as older folks, and if conscientious about staying out of debt, you can achieve financial security and success much more quickly. Our parents didn't necessarily know about the importance of investing and debt-management when they were our age, simply because there wasn't as much readily accessible information out there. With a little bit of Internet research and a measured amount of determination and will power, you can avoid the mistakes that previous generations have made.

September 17, 2010

Get ready for one of the largest corporate migrations in history. It will happen of necessity as managements try to find ways to do things for employees without increasing payroll costs. The move will be from the expensive coasts to less expensive areas.

Moving from a high cost-of-living city to a low cost-of-living one will allow companies to effectively give employees raises (even if they drop their salaries) because the cost-of-living is so much lower. Consider the impact of one simple cost reduction -- having much cheaper housing:

So let's consider the benefits of a move from San Jose (median home price $560,000) to Austin (median home price $182,500). Just make a simple assumption of a mortgage change from $560,000 to $182,500, and home finance costs on a mortgage rate of 5 percent drop from $3,006 a month to $980, liberating about $2,000 a month.

When was the last time you, or anyone you know, got a $24,000-a-year raise?

Later on in the piece, he notes that even if salaries drop (which they do) when you move to lower cost-of-living city, costs drop more and employees end up better off financially. Some examples:

A $75,000-a-year worker moving from Oakland, Calif., to Austin would see his cost of living drop by 29.8 percent and his pay fall by 17.7 percent, gaining $9,121 in disposable income.

A $100,000 worker in Los Angeles could move to Dallas and experience a cost-of-living decline of 30 percent and a salary fall of 9.6 percent to enjoy a net gain in disposable income of $20,388.

A $125,000 worker in Boston could move to Phoenix and experience a cost-of-living decline of 30.4 percent and a pay cut of 13.9 percent and still enjoy an increase in disposable income of $20,635.

A $150,000 worker in San Jose moving to Austin would have a less rewarding experience, with a cost-of-living decline of 26.4 percent and a salary fall of 20.5 percent. Still, the net gain would be $4,460.

Let me say it again: where you live has a very big impact on your finances.

Of course you can live wherever you like (it's your money after all) and there are reasons other than money that people live in one spot rather than another (like living close to family). All I'm asking is that you recognize that there are big financial implications of where you live and to make a conscious decision to either live there or move. Don't assume that living in one place is the same financially as living in any other because the differences are HUGE, especially when compounded over a lifetime. As I noted in my post four years ago:

Think what would happen if you moved from San Francisco to Houston with the same $60,000 national median salary job. This means you'd go from a salary in SF of $72,720 to a salary in Houston of $62,640 (more than a $10k cut in pay) but because of the cost of living in each city, you're $65,520 better off each year!!!! Now, take that over 30 years at a 8% return and it's $7.4 million!

This is just an example. But substitute any lower cost-of-living city for Houston and any higher cost-of-living city for San Francisco and you'll get similar (though maybe not as dramatic) results.

September 16, 2010

In the post A Creative Way to Give, I noted how one FMF reader would pay for meals at restaurants for other couples (and do it anonymously). He did it simply to show kindness to someone else. I asked other readers if they did anything like this and I got several responses. Here are some highlights:

Usually when I see a couple of police officers or military personnel I will pay for their meal without letting hem know. I just tell their server to tell them that their meal was paid by someone who appreciates the job they do.

I've thought about doing this a few times, but have never followed through (for one reason or another.) Think I'll give it a try the next chance I get.

Here's another one:

I had a BOGO Free coupon last week at Smoothie King and gave the other smoothie to a nice lady who was heading into Subway. I also buy a double-cheeseburger, apple pie, and a cup of water for the homeless guy that's always around when I go to the McDonald's near my job. Whenever I have a coupon at Kohl's, I pass it along to the person behind me since they are reusable.

That last one is interesting. Theoretically people could "pass back" a coupon all day so everyone could save, right? ;-)

I especially liked this one:

I've covered a few things like drinks and groceries for others that would have to return it since they didn't have quite enough to cover it - one lady was going to have to choose between peanut butter and jelly - that was heartbreaking. I covered her $50 grocery bill completely and wished her the best...I seriously had to keep myself from crying a little when she hugged me...I hope she's doing better now...

Maybe those of us better off should look for people that need help in grocery stores? Then again, I'm sure I'd have a problem if someone "needed help" while buying name brand stuff while I was purchasing the store brand.

Here's another:

I believe that God grants us little gifts. Sometimes they make a little difference and other times it can mean everything to someone. Every now and again I pay for the person behind me in the drive through - because I know how good it made me feel and I hope that even a small gift like buying lunch for a stranger can really make a big difference.

I've had people do this for me on a toll road. It is nice and does put a smile on my face. Maybe next time I head to Chicago (which seems filled with toll roads), I'll give the cashier some gold coins to pay for the next several people.

Here's an interesting way to "give":

Something I like to do is give a tip to the clerk at a fast-food restaurant. They are probably working for minimum wage and hardly ever get a tip, so I like to give an extra dollar or two at the window when I pick up my order or at the counter. I started doing this as I got older because I remember when I sacked groceries when I was 16 and occasionally someone would give me a tip and it would really make my day.

I have started to leave tips for housekeepers at hotels -- something I didn't used to do -- for the same reason.

Here's a creative way to get rid of those gift cards you don't want/need:

When I receive a gift card, I go to that store and give it to the cashier and ask him/her to use it for the next two consumers. It makes me happy, but it makes the person receiving the free item even happier!

And you don't end up carrying around a gift card for three years. ;-)

Surprisingly, we also had a few people saying that giving in this way wasn't "real" giving or that there was something wrong with it. IMO, there's nothing wrong with giving in any way as long as that's what the person who's giving wants to do. It's their money after all, right? And they are being unselfish with it, right? So what's the issue?

Anyway, many others are of the same opinion and offered their thoughts I'd like to share two. Here's the first:

I completely disagree with those saying you should only give to those desperately in need. I've seen this done, and had it done for me and it really brightens that persons day. The person may or may not need it financially, but it is always nice to know that there are caring generous people out there. You can make a difference in the life of an average joe just as much as someone who is homeless. We should be striving to make the world a better place for everyone we meet. I especially like those who are giving to people in the military or some such.

And another:

It's not like this is the kind of cash that makes me give less to charities (helping those in more desperate situations), they obviously still get much more than these tiny amounts. But I feel more of a sense of duty to give to charity (transferring from those that Have to those that desperately need). The 'gifts' on the other hand feel like true giving, another/different good feeling. Sure, you could always say this could have gone to charities instead, but you can say that about most of the spending we all do.

So, do you have any creative ways to give that you'd like to add to these?

Some of you may think I'm a dunce (not that you don't already) for watching America's Got Talent (AGT). For three years now it has been my family's guilty summertime entertainment choice. We enjoy following the contestants through the process, seeing how America votes, and watcing Piers Morgan blast many of the particimants. Yes, now's the time when you can call me a dunce. ;-)

For those of you who have better things to do with your lives, you may not know that last night was the season finale of AGT. The final came down to soulful singer Michael Grimm beating opera sensation Jackie Evancho (who's 10-years-old, BTW). For those of you interested, here's Michael's last performance:

And here's Jackie performing with Sarah Brightman last night:

For the record, I think Jackie out-performed Sarah and should have won it all, but Michael is a great talent as well (just not as unique.)

The prize, which totals $1,000,000, is payable in a financial annuity over forty years, or the contestant may choose to receive the present cash value of such annuity.

In other words, the prize is like many lotteries: take a smaller amount of cash now, which over time will earn enough interest to make it worth the big amount, or wait for the full amount to trickle in over time as inflation makes each payment less and less valuable.

If we assume the annuity pays a fixed 5 percent interest rate, that would make the one-time payment worth $450,426. That, of course, would be subject to income taxes, so maybe the prize is worth $375,000, about a third of the advertised $1 million.

So that $1 million isn't really going to make him instantly wealthy and he's certainly not going to be paying cash for any home (unless he takes the lump sum -- but even then a home would suck up most of it.) Of course he'll likely go on to fame and fortune and make a boatload more off his music, he just isn't a millionaire today.

It's been awhile since I gave you all an update on what I'm doing with gold $1 coins (if you want to see the last update, read Update on My Gold Coin Purchases). For those of you new to this issue, I'm talking about the $1 coins the US Mint is issuing in an attempt to replace the $1 bill. They are gold in color but are NOT made of gold (hence their value is $1 each.) For more on them, see this link.

I'm still buying gold $1 coins in rolls of 25 (minimum box is $250.) They ship these to me free of charge. I charge them on my Visa and earn 2% cash back. I'll give you an update on how much I've ordered for sure when I do a credit card rewards summary in January, but as of now I've bought $6,500. Since I get 2% back on everything I charge, that means I've earned $130 in credit card rewards cash simply by buying these. :-)

My only commitment to the US Mint is that I do not simply take these coins and deposit them back in the back. I have to USE them (get them into circulation). As you might imagine, getting rid of $6,500 in coins is not an easy thing (especially when we spend most of our money via credit cards -- which we pay off every month BTW.) But here's what I've done so far to get rid of a good number of coins:

I gave a bundle of them to our church as part of my annual giving. Since they are cash, I took them into the office and waited while they were counted. Then I got a receipt for them so I could be sure and get the appropriate tax deduction.

We're still giving out blessing boxes. These continue to be great fun and a unique way to give people a gift.

In addition to blessing boxes (that are for those in need), we give gold $1 coins for birthdays, showers, wedding presents, etc. We put them in some sort of a unique box or container that is a gift as well (it can be reused for something.) This is a nice way to give cash without being so boring by giving "plain old" paper money (and people really seem to love the gold coins.)

Toll booths are a great way to use these coins.

"Small purchases." I keep some of these in my car so when we stop for fast food, a quick drink somewhere, or even a movie (I give everyone their own coins to carry so I'm not walking in jingle jangling like someone who just robbed a bank) the coins are handy to use.

I am keeping an emergency stash of coins in my house. I figure if there's some sort of disaster (like a fire or flood), the coins won't burn/be destroyed and will give us some quick cash we might need.

The coins are GREAT for tips. I usually leave two or three per night I'm in a hotel. I never get to see the response of those receiving the coins, but I bet they appreciate them.

Anyone else out there doing the same thing? How to you use the coins? Or if you have some suggestions on how I can use them, please give me your thoughts in the comments below.

September 15, 2010

I am 25 married and have no children. I just graduated and was hired by a good company in my home town. My wife and I live near by and I planned to commute while we looked for a decent apartment. While at dinner the other day we were talking about our plans when my father asked "why don't you two just come live with us?"

My parents have been empty-nesters for a long time and I am the only child that even lives in the area. I hadn't considered living with my parents as an option and certainly didn't expect the invitation. We can afford an apartment, even an upper scale apartment but living with my parents would allow us to put away over 1k a month.

I have always been prejudice of married adults that live with their parents, thinking that they must be lazy or failures. Neither my wife nor I are either of those and we will probably accept their invitation.

I really like my parents (a lot of people love their parents but don't like them) and so does my wife.

Am I right to think that my situation is the exception for married adults or is it not as uncommon as I thought?

Ok, he's not asking what we all think about the idea of moving back with your parents, but I'm interested in what you think. Good idea or bad idea? What are the things they should consider, be aware of, work out in advance, etc?

The following is an excerpt from The Investment Answer. It's a small, easy read with very nicely designed charts and graphs (which I couldn't put in a post so please use your imagination -- and assume the graphs support what they are saying, because they do.)

Once you and your advisor have decided on the general asset class mix of stocks, bonds, and cash that is right for you, it is time to focus on the specific asset class building blocks to include in your portfolio. While many people understand the idea of “not putting all your eggs in one basket,” most do not understand the concept of effective diversification.

To illustrate, here is a typical situation that we saw during the technology bubble of the late 1990s. A technology executive, in an effort to diversify his large holding of one technology company, bought 10 other technology companies. He thought he was diversifying and was smart to stay with an industry he knew well. Unfortunately, when technology stocks crashed as a group (because they share many common risk factors) his wealth was severely damaged.

The true benefits of diversification are realized when an investor considers the relationship of each asset class to that of every other asset class in his portfolio. It turns out that some asset classes tend to increase in value when others go down (or at least they don’t go down as much). Asset classes that tend to move in tandem, such as companies in the same industry group or those that share similar risk factors, are said to be positively correlated.

Assets that move independently are uncorrelated, and those that move inversely are called negatively correlated.

Figure 3-1 (not shown here) illustrates the benefit of blending two hypothetical asset classes that are negatively correlated. Asset A has different risk and return characteristics than asset B and, therefore, their prices move in opposite directions (when A declines then B rises, and vice versa).

The line labeled AB that runs down the center illustrates a blended portfolio that holds both of these assets equally. The blended portfolio has lower volatility (i.e., lower standard deviation) than either individual asset.

This is an important component of what financial economists call Modern Portfolio Theory. The concept was introduced in 1952 by the Nobel Laureate economist Harry Markowitz. Markowitz first described this idea using individual stocks, but the concept works equally well with mutual funds or entire asset classes.

This concept underscores another very important tenet of investing: focus on the performance of your portfolio as a whole, rather than the returns of its individual components. Do not be discouraged that in any given period some asset classes will not do as well as others.

Domestic Stocks

As a U.S. investor, which specific asset classes should be included in your mix? While this important topic should lend itself to a much broader discussion with your advisor, a reasonable place to start would be to allocate some of your money to domestic large cap stocks, such as the stocks included in the S&P 500 index. After all, these 500 companies account for about 70% of the market capitalization of the entire U.S. stock market.

You can then work with your advisor to identify other domestic equity asset classes that would complement and provide diversification benefits to U.S. large company stocks. We recommend including exposure to U.S. small cap and value stocks, as they can increase your portfolio’s expected return and broaden its diversification. Likewise, real estate investment trusts can serve as a useful diversifier when blended with traditional equity asset classes.

International Stocks

No discussion about investing would be complete without mentioning the benefits of diversifying internationally. Many investors are surprised to discover that the U.S. stock market currently accounts for less than half of the market value of the world’s equity markets. There are many investment and diversification opportunities outside our borders. In addition, with the advances in technology, professional money managers now have upto-the-minute information about developments in countries all over the world, and the ability to move billions from market to market nearly instantaneously. As a result, the long-term expected returns of international asset classes are similar to those of comparable domestic asset classes.

In the short run, the performance of international asset classes can be very different from domestic asset classes. Sometimes international outperforms the U.S., and sometimes the U.S. does better. This is due largely to countries and regions being at different points in their economic cycles, having fluctuating exchange rates, and exercising independent fiscal and monetary policies.

The diversification benefits of international investing are stronger when you include international small-cap and value stocks, as well as emerging market securities (stocks of companies in developing countries). Stocks of these developing countries are especially valuable for diversification because their prices tend to be more closely related to their local economies than to the global economy. By way of contrast, a large international company such as Nestle has operations all over the world, and thus is likely to have a higher correlation with other large companies in the U.S. and abroad.

Domestic Bonds

Remember that the role of fixed income is to reduce the overall volatility of your portfolio. When including bonds in your mix, we recommend using higher quality issues (bonds with higher credit ratings) and those with shorter maturities (less than five years) reduce risk most effectively. These types of bonds are safer, more liquid, and less volatile.

International Bonds

Like international stocks, international bonds can be excellent diversifiers for your portfolio. As with domestic fixed income, consider using shorter maturities and higher-quality issues. An international bond portfolio that blends U.S. bonds with those from other developed countries can have lower risk and greater expected returns than a comparable all-U.S. bond portfolio.

Use Asset Classes

With the help of today’s sophisticated computer programs, an advisor can access the historical risk and return data of different asset classes and construct a portfolio that maximizes expected returns for any given level of risk. Figure 3-2 demonstrates this concept. Higher risk/return portfolios usually have greater percentages in stocks.

Notice that the risk level reduces as the initial stock market exposure (up to about 20 percent) is added to the 100 percent bond portfolio. This is caused by the diversification benefits available from adding riskier assets that do not move in perfect unison with the other assets in your portfolio.

It’s up to you and your advisor to determine how much risk is appropriate for you.

Home Ownership. The step up from renting to owning signifies prosperity and achievement.

Automobile Ownership. Owning an automobile provides freedom of movement and the luxury of avoiding the limited schedules and cramped quarters offered by mass transportation options such as buses and subways.

A College Education for the Kids. Helping children get ahead in life is a primary goal for middle class families.

Family Vacation. Vacations demonstrate that a family has disposable income and has been successful enough to take time away from work to focus on leisure.

Some thoughts from me:

Home ownership is a questionable sign of the middle class these days IMO. In many cases, renting may be the smarter option.

I thought that "everyone" owned a car. Surely most lower class people own cars, right? I'm thinking only the poorest of the poor or those who choose not to have a vehicle are the only ones carless. Or am I way off base?

These days a debt-free college education is a sign of 1) an upper class family or 2) a smart middle class family that knows how to save on college expenses.

IMO, very few people have retirement security. To truly be secure in retirement, you need enough net worth to put you in what I'd call the upper class.

Interesting that health care coverage is a sign of being in the middle class. I don't think that will last long (as the new government rules on health care come into effect.)

Ha! Yes, I guess a "nice" vacation would be a sign of being in the middle class. It could also be a sign of over spending. ;-)

September 14, 2010

Due to some health challenges our son has experienced, my wife has had to stop working until the New Year to care for him. While she was only working part-time, her income will be missed and we also will need to pay COBRA for her and the baby for health insurance, about $400/month. Our son's special formula and medicines are also running us about $300/month more than we expected, and then there are copays for hospital visits.

Prior to our little man's birth we were excellent savers, socking away up to 40% of our income some years without even using a budget. This year, we have had several months where our spending outpaced our income by $300 to as much as $1000 in one month. Some of these were bills from the hospital from the birth, others were baby expenses we could not predict.

These monthly numbers showed us we needed to step up our game. With that in mind, we have adopted a monthly budget we monitor in Quicken, designed for us to live off 24 of my paychecks (I get 26 per year), and my wife has started tutoring some students at home for extra money. We have not had cable tv in over a year and do not pay for landline phone service, and we buy most of our clothes at thrift stores, so we are familiar with frugal living. As we near the end of our first budget month, we are likely to hit our budget and even have some money left over, maybe $200-$300.

The question we have is: based on the conditions below, how would you deploy any money unspent in the family budget? The places we could direct it include:

We have 11 accounts at ING Direct with different purposes. Several of them are escrow accounts for large one-time or two-time per year payments like life and car insurance. These monthly set-aside payments are IN the family budget. Others are for charitable giving, vacations to visit family (who all live over 200 miles away), and car repairs. Our specific "Emergency Fund" ING account is the largest at about $1600, and in the budget we add about $135 per month. When totaling up our taxable investment account, (which could all be cashed in tomorrow if need be) our checking account and all the ING accounts, we have about $16,000 in cash or near-cash instruments. Six months of truly bare bones expenses for us is about $18,000.

DEBT REDUCTION

We have a 2/1 ARM mortgage through our credit union, presently at 3.75%. It can reset every two years and never move up by more than 1.0% at a time, and never more than 5% total over the life of the loan. With escrow for insurance and taxes, our payment is about $1420/month, balance of about $226k. The first reset comes next summer.

We have a monthly car payment of $200 on a recently purchased used car. 3 months down, 45 to go, balance of about $8200. Fixed rate of 4.75%.

I have student loans of $230 a month. Interest rate fixed at 2.125%, balance of about $37,000.

We have the remainder of an interest-free bridge loan from my cousin we used to buy our house. When we sold our old house, we paid back 85% of the loan immediately, and have now paid him back 95%, with about $2700 left to go. He has been very understanding and flexible and we are currently paying him $100 month. (Previously we were paying $400) If we asked him to let it slide for a year, he would do so without damage to his finances or our relationship. Still, we only want to go there as a last resort and want to pay him back because it's the right thing to do and we are grateful for his generosity.

ROTH IRA for WIFE

Only a few thousand dollars in it. Want to build it up while we are young if we can.

MY 401K

Current budget includes a contribution of 6% of my salary. My company does not have a traditional matching program, but kicks in 8% of my salary regardless of how much I participate.

My job situation is very stable- I am in a leadership role at a medium-sized company where my skills are critical to both the budget and communications/marketing. I make a little over $60k/year. The company is managed very conservatively and our financial position is strong. Layoffs are not a concern, nor is my company's viability.

With all this in mind, we are scrimping and saving to make sure we are not falling behind each month, but are unsure how to best strengthen our position. If you were in our shoes, how would you deploy a $200-$300 surplus?

Early graduation is a big money-saver. Test out of classes if you can. Attend summer session. Investigate dual enrollment in high school and community college. Also: Seek colleges with three-year bachelor's degree programs.

Pick a solid school that's also affordable. Consider two years of community college (but make sure all the credits will transfer).

Tuition is a bill, so pay it -- but not all at once. Expect your kids to pay most of it.

You can work while in school. Organization is key. Also: "True Blood" marathons are not the college experience; they are an indulgence that you may not be able to afford right now.

My thoughts on these:

Overall, GREAT tips! Using them can save people thousands (if not tens of thousands) of dollars on college costs.

My kids are on track to be able to take some college classes while in high school. They are going to be able to do this because they are taking some high school classes while in middle school (and thus will have the time later to take college courses.)

I like the idea of a three-year bachelor's degree versus a four-year one (assuming employers treat it the same.) By going three versus four years you lope off 1/4 (or so) of costs right away. Cool!

I've always said to pick a "good" school (not the most expensive) that gets you to where you want to go (and be employed.) No reason to pay $45,000-a-year in tuition when a $20,000-a-year college gets you the same starting job.

I don't expect my kids to pay most of their college costs -- unless you count scholarships they receive off "list price". (In that case, I'm counting on at least one of my kids doing enough to save me a bundle. If both do, I'd be ecstatic!) The rule-of-thumb is 1/3, 1/3, and 1/3 when paying for college: 1/3 is paid from savings, 1/3 from current income, and 1/3 from loans for the student (this is after scholarships, of course.) My plan is 100% from savings. We'll see how that goes. ;-)

Yes, I expect my kids to work to help pay for school. Certainly leading up to college (my son is already making a good income refereeing soccer games) and during the summers, but probably at least a bit while in school too.

I want the kids to have fun in college too, but they are going to have to pick and choose what they do (kinda like us "grown-ups" have to.) They'll need to manage/control their spending to make sure they can participate in those activities that are most important to them.

The following is an excerpt from The Investment Answer. It's a small, easy read with very nicely designed charts and graphs (which I couldn't put in a post so I have included them in red below.) Much of what the authors say here are reasons why I choose to invest in index funds. If you've ever wondered why passive investing beats active investing, this article is for you.

Active Investing

Active managers attempt to “beat the market” (or their relevant benchmarks) through a variety of techniques such as stock picking and market timing. In contrast, passive managers avoid subjective forecasts, take a longer-term view, and work to deliver market-like returns.

The Efficient Markets Hypothesis asserts that no investor will consistently beat the market over long periods except by chance. Active managers test this hypothesis every day through their efforts to outperform their benchmarks and deliver superior risk-adjusted returns. The preponderance of evidence shows that their efforts are unsuccessful.

[The list below] shows the percentage of actively managed equity mutual funds that failed to outperform their respective benchmarks for the five-year period ending December 31, 2009. The message here is that most funds failed to beat their respective benchmarks. (If international small-cap managers had been correctly compared to an index that included emerging markets, the rate of underperformance would rise to the 70 to 80 percent range, which is in line with the other categories.)

Source: Standard & Poor’s Indices Versus Active Funds Scorecard, March 30, 2010. Indicies used for comparison: US Large Cap—S&P 500 Index, US Mid Cap—S&P Mid Cap 400 Index, US Small Cap—S&P Small Cap Index, Global Funds—S&P Global 1200 Index, International—S&P 700 Index, International Small—S&P Developed ex.-US Small Cap Index, Emerging Markets—S&P IFCI Composite. Data for the SPIVA study is from the CRSP Survior-Bias-Free US Mutual Fund Database. Results are net of fees and expenses. Indices are not available for direct investment.

Active managers attempt to outperform the market (or a benchmark index) by assembling a portfolio that is different from the market. Active managers think they can beat the market through superior analysis and research. Sometimes, these managers consider fundamental factors such as accounting data or economic statistics. Others will perform technical analysis using charts and graphs of historical prices, trading volume, or other indicators, believing these are predictive of future price movements.

For the most part, in an attempt to beat their benchmarks, active managers will make concentrated bets by holding only those securities they think will be the top performers and rejecting the rest. This approach, of course, comes at the expense of diversification. It also makes it difficult to use active strategies in a portfolio to reliably capture the returns of a target asset class or control a portfolio’s overall allocation.

Studies show that the returns of active managers can be very different from their benchmarks, and their portfolios often overlap across multiple asset classes.

There are two primary ways that active managers try to beat the market: (1) Market timing, and (2) Security selection.

Market timers attempt to predict the future direction of market prices and place a bet accordingly. Because no one can reliably predict the future, it should come as no surprise that the overwhelming evidence suggests market timing is a losing proposition.

Another reason it is so hard to time markets is that markets tend to have bursts of large gains (or losses) that are concentrated in a relatively small number of trading days. [The information below] shows that if an investor misses just a few of the best performing trading days, he loses a large percentage of the market’s total returns. We believe it is impossible to predict ahead of time when the best (or worst) days will occur.

The other active management technique is security selection (or stock picking). This involves attempting to identify securities that are mispriced by the market with the hope that the pricing error will soon correct itself and the securities will outperform. In Wall Street parlance, an active manager considers a security to be either undervalued, overvalued, or fairly valued. Active managers buy the securities they think are undervalued (the potential “winners”) and sell those they think are overvalued (the potential “losers”).

You should know that whenever you buy or sell a security, you are making a bet. You are trading against the view of many market participants who may have better information than you do. When markets are working properly, all known information is reflected in market prices, so your bet has about a 50% chance of beating the market (and less after costs are taken into account).

Again, Wall Street and the media have a vested interest in leading us to believe that we can beat the market if we are smarter and harder-working than others. Yet, through today’s technological advances, new information is readily available and becomes almost instantly reflected in securities prices. Markets work because no single investor can reliably profit at the expense of other investors.

The idea that prices reflect all the knowledge and expectations of investors is known in academic circles as the Efficient Markets Hypothesis, which was developed by Professor Eugene Fama of the University of Chicago Booth School of Business.

The Efficient Markets Hypothesis is sometimes misinterpreted as meaning that market prices are always correct. This is not the case. A properly functioning market may get prices wrong for a time, but it does so randomly and unpredictably such that no investor can systematically outperform other investors, or the market as a whole.

Finding the Winning Managers

Still, many investors want to believe that they will be able to beat the market if they can identify a smarter, harder-working, and more talented manager — a Roger Federer or Michael Jordan of money management. Of course, it is easy to find a top performer after the fact. They are then held out as “geniuses” by the media. But how do you identify tomorrow’s top managers before they have their run of good performance?

The most common method is by examining past performance, the theory being that good past performance must mean good future performance. Financial magazines like Forbes, and rating services such as Morningstar, love to publish this data as these are some of their best selling issues. Mutual fund companies are also quick to advertise their best performing “hot funds” because this attracts new money from investors. Despite all of this activity, there is little evidence to suggest that past performance is indicative of future performance.

Passive Investing

A more sensible approach to investing is passive investing. This is based on the belief that markets are efficient and extremely difficult to beat, especially after costs. Passive managers seek to deliver the returns of an asset class or sector of the market. They do this by investing very broadly in all, or a large portion of, the securities of a target asset class.

The best known (but not the only) method of passive investing is called indexing, which involves a manager purchasing all of the securities in a benchmark index in the exact proportions as the index. The manager then tracks (or replicates) the results of that benchmark, index less any operating costs. The most popular benchmark index is the S&P 500, which is comprised of 500 U.S. large cap stocks that currently make up about 70 percent of the market capitalization of the U.S. stock market.

Cash Drag

Because active managers are always looking for the next winner, they tend to keep more cash on hand so they can move quickly when the next (perceived) great investment opportunity arises. Since the return on short-term cash investments is generally much less than that of riskier asset classes like equities, holding these higher cash levels can end up reducing an active manager’s returns. Passive managers are more fully invested, which means that more of your money is working for you all the time.

Consistency

Another advantage of passive investing is that you and your advisor can select a group of asset classes that work well together like the efficient building blocks of a portfolio. Done correctly, the building blocks will have few securities in common (called cross-holdings) and the risk and return profiles of each will be unique.

Sometimes an active manager will change his investment style in an attempt to beat his benchmark. For example, a large cap value manager may suddenly start purchasing large growth stocks if he feels that large growth stocks are about to take off. This “style drift” can be problematic, especially if you already have a large growth fund in your portfolio. In this case, you would now have overlapping risk and less diversification. Trying to build a portfolio using active managers causes you to lose control of the diversification decision.

Costs Matter

One explanation for the underperformance of active management was set forth by Nobel Laureate William Sharpe of Stanford University.

Sharpe ingeniously pointed out that, as a group, active managers must always underperform passive managers. This is because investors as a whole can earn no more than the total return of the market (there is only so much juice in an orange). Since active managers’ costs are higher— they pay more for trading and research — it follows that the return after costs from active managers as a group must be lower than that of passive managers.

This holds true for every asset class, even supposedly less-efficient ones like small-cap and emerging markets, where it is often said that active managers have an edge because information is less available. Sharpe’s observation confirms that because of their higher costs in these markets, active managers should collectively underperform by more than in larger, more widely traded markets — the opposite of convention wisdom.

The higher costs of active management can be broken down into three categories:

1. Higher manager expenses. It is more costly for an active manager to employ high-priced research analysts, technicians, and economists, all of whom are searching for the next great investment idea. Other active management costs include fund marketing and sales costs, such as 12b-1 fees and loads, to attract money from investors or to get Wall Street brokers to sell their funds. The expense differential between active and passive approaches to investing can exceed one percent per year.

2. Increased turnover. As active managers try to provide superior returns, they tend to trade more often and more aggressively than passive managers. This usually means paying greater brokerage commissions, which are passed on to shareholders in the form of reduced returns. It also means that market-impact costs can increase dramatically. When an active manager is motivated to buy or sell, he may have to pay up significantly in order to execute the transaction quickly or in large volume (think of a motivated buyer or seller in real estate).

These higher market-impact costs are more prevalent in less liquid areas of the market such as small cap and emerging markets stocks. It is not uncommon for turnover in actively managed funds to exceed that of index funds by four times or more. The extra trading costs for active management can exceed one percent per year.

3. Greater tax exposure. Given that active managers trade more often, it follows that taxable investors will incur accelerated capital gains as a result. Remember, if your mutual fund sells a security for a gain, that profit may be passed on to you as a taxable distribution. For securities held longer than one year, you would pay the long-term capital gains rate, while short-term capital gains would apply for securities held less than one year. The additional taxes due to accelerated capital gains generated by active managers may exceed one percent per year.

It is important to understand that of these three categories, typically only manager expenses are disclosed to investors. These are usually expressed as a percentage of net asset value in the case of a mutual fund, and is called the operating expense of the fund. For actively managed equity funds, the average operating expense ratio is around 1.3 percent per year. Passive funds, on the other hand, can cost much less than 0.5 percent.

If the additional costs of active management run roughly two to three percent annually, then the active manager clearly faces a huge hurdle just to match the results of a passive alternative such as an index fund.

[The information below] compares the ending value of a hypothetical investment (growing at a rate of eight percent per year before fees) at various rates of annual investment expenses. Notice how every incremental percent in costs can add up and reduce your long-term ending wealth.

According to Fidelity, a family making $55,000 would need to save $48,000 to cover the qualified expenses of a public university and $107,000 to cover such costs for a private one. This translates into saving $160 a month for a public college and $410 a month for a private one.

In contrast, a family making $75,000 would need to save $51,000 total, or $190 a month, for a public university and $115,000 total, or $410 monthly, for a private one. Finally, according to Fidelity, a family making $100,000 would need to save $55,000, or $250 a month, for a public university and $123,000, or $460 monthly, for a private one.

So, how are you doing?

BTW, this assumes that you're paying all of your kid's college expenses yourself (no loans) and that you're paying it all out of savings (versus out of current income). And the biggest assumption (at least some will say this is the biggest) is that you're paying for your kids' college expenses in the first place. But we've debated that over and over, so I'll skip it for now.

What I'd like to discuss is how we are all doing when compared to these guidelines. I'll start:

1. Here's my college-paying/saving philosophy:

My kids will do the best they can in school so they can maximize potential scholarships. This is their contribution to college (plus a bit of savings and potentially working during school.)

We will together select a school that we think is a good value (one that gets them where they want to be in life/career that doesn't cost an arm and a leg.)

My wife and I will pay for this.

We will save for the vast majority of these expenses in advance so we don't have to spend anything out of current income. We're saving using Education Savings Accounts and 529s for our kids.

2. That said, we need to save somewhere in the $55,000 to $123,000 range. Since we're pretty good bargain-hunters and know a bit about saving on college expenses (like taking some classes while in high school, going to a community college the first two years of school, etc.), I think we'll be closer to $55k than $123k even if our kids go to a private school. So let's say we'll need $75k for each kid saved to cover college expenses.

3. We currently have $55k saved for each child. My son will be off to college in four or five years and my daughter a couple years after that. So we should be good (we sock away at least $5k per child per year to get the max state tax savings from our 529s.)

As one commenter said of the list: "Firm grasp of the obvious and astute hindsight." Ha!

I had the same reaction. It's a good list IMO, but these aren't really "new" rules, are they? Haven't the fundamentals of good finances always been saving (and doing it early), keeping spending in line, eliminating debt, and so on? Yes, I think they have.

The one "new" point that they bring up here (that we all know as well but no one seems to verbalize it) is that the days of counting on 10% investment return are probably gone -- at least for awhile. Personally, it's not a big deal to me because I spend the least amount of time working on (and put the least amount of effort into) getting the best return rate.

Now that doesn't mean I settle for any rate of return. Of course I want to make as much on my investments as possible. But I don't obsess over something I can't control. I do obsess over things I can control (saving a lot as soon as possible). So far, it's working well for me.

For any potential investor out there, I'd suggest the same. Save as much as you can as soon as you can and keep adding to it through the years. Doing these two simple things will separate you from the pack quite quickly and ultimately make you wealthy.